In the lead-up to Sept. 25's Worldwide Invest Better Day, The Motley Fool is reacquainting investors with the basic building blocks of investing. As part of that push, we asked a group of our best analysts, "What's the best investment advice you ever got?"
Here's what they said.
Morgan Housel: Several years ago I interviewed a hedge fund manager named Mohnish Pabrai. He's not a household name, but Pabrai's results make him one of the world's greatest investors of the last 15 years.
I asked him what his secret was. "Control over my emotions," he said. "That's it?" I asked? He laughed. "It's huge. You'd be surprised."
That's probably the best advice any investor can receive. Investors are their own worst enemies. Any time you find yourself eager to make a big change to your portfolio while in the fog of emotion -- either fear or greed -- stop! You're probably about to do something regrettable.
Obvious stuff, right? I mean, Social Security isn't going to cover my needs all on its own, and I sure don't want to work until I'm 80. But this central bit of financial wisdom wasn't so obvious when I first heard it, fresh out of college in my mid-20s.
Many youngsters, myself included, could very easily forget about their employer's 401(k) plan and never learn about IRA accounts at all, choosing to spend their money on short-term wants and needs instead. "Retirement's four decades away. Why should I care now?"
But I joined my first employer's 401(k) as a deduction from my very first paycheck. Intrigued by the markets, I then dove into learning about stock picking -- right here at the Fool. Now I have a substantial portion of my family's assets locked up in IRA accounts and other long-term investment vehicles, and I'm on track to meet my retirement goals.
The earlier you get started, the better. I'm glad I caught the investing bug so early.
LouAnn Lofton: I read Peter Lynch's One Up on Wall Street early on in my investing career, and his tales of stumbling across great investment ideas in his everyday life (or his wife's everyday life) made an impression on me. I thought about it less as "buy what you know" than I did "keep your eyes open." That turned out to be great advice. Looking at the companies you interact with on a regular basis through the lens of possible investment opportunities became second nature to me. Naturally, you've got to follow up your initial thoughts with solid research, but it's a wonderful place to start. I can point to several market-beating holdings in my portfolio as examples of this, whether it's companies I've owned since 1998 like Starbucks (Nasdaq: SBUX ) and Nike, or more recent additions like Chipotle (NYSE: CMG ) and Apple (Nasdaq: AAPL ) . And the search continues -- I've always got my eyes open for that next potentially great idea.
Dan Caplinger: The best investment advice I ever got was to rebalance my portfolio on a regular basis. For me, the biggest benefit from rebalancing is that it keeps me in a mind-set where I'm looking to buy stocks and other investments when they're cheap and sell them when they're expensive. For instance, back in 1999 and 2000, my holdings in Intel and Microsoft had soared to become a huge part of my portfolio. Rebalancing led me to trim those positions near their highs, and while I didn't escape the tech bust entirely, the stocks I replaced them with performed a lot better than the tech sector. Since then, whether it's been emerging-market stocks, a soaring bond market, or my precious-metals holdings, periodically selling a bit of my winning positions has given me capital to focus on finding new investments that offer good value propositions.
Molly McCluskey: "Have an exit strategy."
Everyone wants to root for the underdog, but when the reasons you bought a stock are no longer valid, when the new products haven't panned out, key leadership has moved on, or new competition does it better, faster, and cheaper, it might be hard to let go.
Before I purchase a stock, I make sure I know exactly why I'm buying it. What specific event or promise does this company hold, what will it look like when that promise is fulfilled, and when it's not? It's important to remain flexible (new leadership may breathe new life) but not delusional (the company hasn't declared profits in five years, but they're due to any day now!), and always know where your line is, and when it's time to move on.
Tim Beyers: Peter Lynch, who said to invest in what you know or can learn. Buffett's circle of competence is an intellectual peer of this concept, which essentially advises investors to spend time investigating and valuing the businesses they're most likely to be interested in -- whether it be due to professional expertise, emotional affiliation, or just plain curiosity. For my own part, taking this maxim to heart freed me to dig into the deep tech and entertainment business I love most. They've also led to my biggest winners, which include Apple and Marvel Entertainment before it was acquired by Walt Disney in 2009.
Anand Chokkavelu, CFA: I can't narrow it down to just one, so I'll cheat by linking to an article I wrote detailing the 100 things I've learned in investing. No. 85 is "If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game." Enjoy the rest of this roundtable!
Eric Volkman: Even as a young, green, not particularly good investor, I quickly grew leery of the "one metric rules them all" advice commonly offered to people like myself. But there's one I keep to heart, and that's the admonition to BEWARE OF DEBT. This was vividly imparted to me through the example of creeping ivy -- the stuff grows and grows and grows until it chokes the life out of any plant unfortunate enough to get in its way. Perhaps aided by that colorful metaphor, I've tried to steer toward modestly leveraged companies when investing. More often than not, those have been the ones that have made me money.
Chris Baines: Never forget that a stock represents ownership of a business, not a price that wiggles on a screen. I credit the Great Buffster for this piece of advice -- though he got it from the inimitable Ben Graham.
Despite its obviousness, this is largely ignored on Wall Street: Highly educated analysts view short-term company setbacks as Armageddon, a reason to sell stock (usually after it's become cheap). Similarly, very popular stocks -- like longtime Motley Fool Stock Advisor recommendation Netflix circa 2010/2011 -- are pumped to the moon with scarce regard for valuation. If these analysts viewed stocks as businesses -- like Buffett does -- they wouldn't think this way. In that case, their prognostications might be more on the money.
Matt Thalman: Like you do with a jacket, "check your emotions at the door." Our emotions are great in so many situations, but when it comes to investing, they can ruin a well thought-out plan and bankrupt a strong portfolio. And please don't fool yourself; this is a very difficult trait for investors to master. We all feel excited when a stock makes a big move up and we see nothing but dollar signs. Or when months of research and work tell us that a stock will rebound, but the fear of losing more money takes control. Even the great Peter Lynch makes it difficult for us to invest emotion-free. When following Lynch's advice, "Invest in what you know," your immediate bias is positive because you may already love their product. Can anyone say Apple?
Jacob Roche: "Don't get cute."
When I first started investing with options, months before Motley Fool Options existed, I was a big fan of Twitter user Steve Place (@StevenPlace). He hosted a weekly happy hour for his Twitter followers, during which he would drink beer, discuss market commentary from his perspective as a technical analyst, and offer options strategies to take advantage of different situations.
As anyone who's traded options knows, you can build some really complicated positions to suit any situation. But one thing Steve would say over and over was "don't get cute." There is rarely a situation where you need a broken-wing-butterfly or an iron-condor-wading-in-the-rushes. Complicated positions have their uses, but most of the time buying a put or selling a covered call is all you need to express your investment thesis, and anything more complicated will just increase your transaction costs, increase the time you spend doting over the position, and overall give you a headache. Don't get cute. A simple strategy usually wins the day.
Alex Dumortier, CFA: The best investment advice I ever got was from the Oracle of Omaha himself, Berkshire Hathaway (NYSE: BRK-B ) CEO Warren Buffett, who advised me to read Ben Graham's The Intelligent Investor. He didn't give me this advice personally, mind you, but he recommended it in writing and has gone as far as calling it "by far the best book on investing ever written." Coming from arguably the greatest investor in history, I thought this counsel was worth following and I wasn't disappointed. The Intelligent Investor was the first complete, rational presentation of what it means to be an investor that I came across and it remains the best that I have seen to date. Don't be put off by the 1949 original publication date. The principles it contains are timeless. Unless you consider yourself an Immaculate Conception as an investor, this is the book to read before all else.
Tim Brugger: It was spring of 1991, and I'd been a financial advisor for all of six months. In other words, I knew pretty much everything there was to know -- or so I thought. At the time, IBM (NYSE: IBM ) was flying high with a stock price hovering near $130 a share, and was the envy of corporate America.
But even as expenses soared, IBM was lagging the market in new technologies, and consistently angered longtime customers with horrendous service.
A year and a half later, the stock price was at $42 and many doubted whether Big Blue could turn things around. Clients were answering their phones screaming "Sell!" "Sell!" without even knowing who was on the line.
Thankfully, before I was able to do too much damage, a veteran advisor pulled me aside and asked me a simple question. "Tim, do you think IBM is going bankrupt?" I told him I didn't think so; it's IBM for heaven's sake. "So," he said, "why aren't you advising your clients to buy at these depressed levels, instead of faithfully filling their sell orders?"
I did, and within two years IBM stock was again trading above $100 a share, after steadily climbing month after month. The moral of the story: If you invest in fundamentally sound companies that meet your objectives, recognize even those suffer through inevitable cycles. So, take advantage and buy on the sell-offs.
Brenton Flynn: I was working as an equity research analyst for Robert W. Baird during one of the most frightening times to be invested in equities, late 2008/early 2009. It was a hard time to be positive about the future for investors after suffering such massive declines, but I'll never forget the advice I was given by Bruce Bittles, chief market strategist at Baird. He said that for a young twenty-something kid, this was the opportunity of a lifetime to invest, and he encouraged me to buy as much as I could afford to. He was proven right, and since early March of 2009 the S&P 500 index has more than doubled. Lesson: Crisis equals opportunity.
Dan Radovsky: Best investment advice I ever got? Well, it wasn't "Plastics." I don't have to dig deep to recall the sagest word to the wise I've gotten. As a matter of fact, it's the only advice I would ever give to anybody, and if I remember correctly from my reading of The Intelligent Investor, it's the only investment scheme that Benjamin Graham could ever advise.
It is simply this: dollar-cost-averaging. Invest the same amount of money on a regular basis in whatever stock, mutual fund, or index fund you want, and then... keep doing it.
The beauty of it is if the share price goes up, great, you're wealthier (on paper, at least), and if the share price goes down, great, you can buy more shares for the same amount of money. It's not a get-rich-quick scheme; it's a get-rich-slow plan.
Dan Newman: Being someone to make rash decisions at the drop of a hat, the best investment advice I ever noted is that there was always time to invest. Yes, you should start saving for the future as soon as it's possible, but if a company represents a good investment, you don't need to jump in right away and skip the research you should do beforehand. The stock market will be open the next business day, and if the company truly deserves your investment, you can buy it then, usually without sacrificing much return.
Evan Niu, CFA: Never try to compete with woulda, shoulda, or coulda, because you simply can't beat them. This is meaningful to me because as humans and investors, we're prone to make mistakes. On top of that, we mere humans decidedly lack the ability to predict the future, although not for a lack of trying. Don't dwell on the past. Learn from it, but always focus on the present and the future.
Andrew Marder: Invest for a reason, and keep that reason in mind. That's the best indirect, investing advice I got from my grandfather, as a child. By the time I was in my teens, he had worked hard, spent cautiously, and invested wisely, and was able to help put me and all of my cousins through college. He was able to do it because he always had that end goal in mind.
We all say we want to invest for our future, but the future is a very amorphous idea. A much better strategy is to form a clear set of goals. You want $X in your retirement account by 2025. Your kid needs $Y in his college fund (here's a hint, make that number $Y x 2).
Having those goals not only focuses you on a final goal, it helps you manage risk. If you just set out to have more money, you'll take risks in an odd way. Once you can say, "This is for little Suzy's first car," you'll probably get out of Zynga and into Coke -- it's one thing to risk numbers in an account, it's a very different thing to risk the well-being of your family.
Keith Speights: The best investment advice I ever got was from a manager at my first job after graduating from college. He told me to begin putting as much money as I could into the company's 401(k) plan and at least contribute up to the matching amount. His words were, "If someone's giving you money for free, take it." He was right, and I followed his advice. Starting investing at a young age was one of the best financial steps I have ever taken.
Sean Williams: Being passionate about the stock market, I can sometimes get a little carried away with overthinking my next move. In my early trading years you'd often catch me waiting for the next pullback on the edge of my seat and wondering about how well my portfolio would handle the next big down day. One day, while talking a former co-worker's ear off about how there's no chance I could be wrong about my bet against the S&P 500, he turned to me and said, "Feelings won't help you retire."
He was absolutely right. Emotional trading won't help you retire and short-term gyrations in the market are little reason for my hair to go gray (I can let my love for the Detroit Lions take care of that). Now, taking a longer-term view I have more time to focus on the intangibles of what makes a business great (see my CEO of the Week series for proof of this) and I find myself much less stressed when it comes to investing.
Chuck Saletta: The best investment advice I ever got came from my mother, who told me to "make it automatic." Her suggestion to me was to sign up for automatic paycheck deductions into my 401(k) as soon as I was eligible and put away as much as they'd let me. As she promised, I never really missed the money that never made it to my hands, and over the years of largely automatic compounding, it has grown into a surprisingly comfortable nest egg.
We hope you enjoyed the roundtable. Click on the button below for more on Worldwide Invest Better Day.