The 10 Best Things I Learned About Investing This Summer

It's been a fantastic summer as an intern here at The Motley Fool. In many ways, I feel as if I was paid to learn, and this is one of the best environments to do just that. I have barely scratched the surface of an investing education, but as with many things in life, learning the fundamentals first leads to the greatest rewards. Here are the 10 best things I learned about investing this summer:

1. First thing to look for: a firm's market opportunity. It seems obvious, but if you're looking for growth, you'd better make sure there's room to grow.

2. As an investor, never bet against convenience. Netflix is a great company, but the Qwikster fiasco failed because it altered the company's value proposition: aggregating content in one location. For consumers, one click is always better than two.

3. There's no substitute for active reading and learning (pen in hand, and choosing primary sources over secondary). Charlie Munger once said Warren Buffett accomplished his outstanding investment performance by "sitting on his ass and reading."

4. Be a skeptic when reading. Behind every shareholder letter and analyst report, there is an incentive. Awareness of those incentives can help you avoid mistakes.

5. Build an investing checklist and do everything possible to eliminate cognitive biases. Here's an example of a qualitative checklist I built for myself:

  • Do I understand the business model -- i.e., how does the company make money?
  • Is it a company I enjoy following to the extent that I will continue to follow it for the next five to 10 years?
  • Does the company have a sustainable competitive advantage?
  • Does the company have a significant market opportunity?
  • Does the company have the ability to raise prices? Ask yourself if you would pay more for the product or service (even a sample size of one can be illuminating in this regard).
  • Do I trust the company's leadership -- i.e., are they honest, do I admire them, what's their character?
  • Does the company have competitors, and if so, why shouldn't I buy them? Looking broader, are there better companies I could buy for the same market cap?
  • Is the company in a growing or sustainable industry?
  • What are the potential industry disruptors?
  • Will they be doing or selling more of what they do or sell in five years?
  • Is this a balance sheet or an income statement company? Is this a manufacturing or a distribution company? (These two questions tell you where to focus and they can be trickier than they seem.  For example, fellow Fool Buck Hartzell often points out that Coca-Cola's advertising claims they make the best soft drinks, but their true strength lies in distribution.)
  • Have you discussed this with at least three people who disagree with you?

6. If you have a great experience with a company, buy some shares. Skin in the game keeps you interested.

7. When the market goes up, it's OK to check your stocks frequently. When the market goes down, as long as your investment thesis remains intact, spend less time checking and more time doing the things you enjoy. You're winning either way.

8. Time is the advantage the individual investor has over the institutional investor. Furthermore, the longer your holding period, the less it matters whether the stock is selling at a premium or a discount.

9. A stock's fair value is impossible to predict to an exact degree, but you should still use accepted techniques to come up with estimates to aid your decision within the broader context of your qualitative investment frameworks. Warren Buffett points out that if you have to go to the fifth decimal in your valuation to make money, you're looking at the wrong company.  

10. There is no catch-all strategy when it comes to investing. If you're not willing to actively learn, then indexing is the way to go.

These 10 points are just the first of many that I hope to learn over the years. Here is my pledge: Every year I will publish the 10 best things I have learned about investing during that year. For the greatest investors, learning never stops. I am a long way from being a great investor, but I'll see you next year nonetheless.

At the heart of the Fool's investing approach is the belief in choosing great companies and sticking with them for the long term. The Motley Fool's free report "3 Stocks That Will Help You Retire Rich" names stocks that could help you build long-term wealth and retire well, along with some winning wealth-building strategies that every investor should be aware of. Click here now to keep reading.


Read/Post Comments (9) | Recommend This Article (123)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On August 02, 2013, at 1:29 PM, TMFBoomer wrote:

    Sage advice from a young whipper snapper.

    Keep up the great work, Jake, and best of luck with your senior year and future investing endeavors.

    Isaac

    @TMFBoomer

    Also, do you have any tips on the best Philly cheese steak stops?

  • Report this Comment On August 02, 2013, at 2:21 PM, FooLawson wrote:

    I love the enthusiasm Jake,

    We need more of our generation to understand about investing...

    I have been wanting to intern at the fool for years, but there is only a problem for me which is I live in LA. So as an intern I would also need a place to stay in Alexandria and I have looked the apartments there are not cheap! I know I would love the position and the people. That sounds like an awesome experience.

    Fool on

    Foolishly,

    FooLawson

  • Report this Comment On August 02, 2013, at 4:43 PM, TMFAlison wrote:

    Did you learn nothing from Pizza Day?! What about the valuable lesson of survival to be had from office nerf gun fights?

    Best of luck, jake! Stay Foolish!

  • Report this Comment On August 02, 2013, at 8:35 PM, tomd728 wrote:

    Nice job Jake and it is always but always a good idea to review those questions before hitting buy !

    Too many times pure impulse plays a role in stock selection off a rec by a well meaning friend, a service, an unmitigated tout, etc. And all simple steps to anyone's checklist and before getting into the financials.

    Write it up and put it up on a wall right in front of the computer.

  • Report this Comment On August 02, 2013, at 9:26 PM, libindaniel2000 wrote:

    How often does Fool take an intern who is enthusiastic fool but is in a completely different field, say, engineering?

    You guys seem like a load of fun and a ton of wisdom at the same time!

  • Report this Comment On August 04, 2013, at 7:03 PM, doctrot wrote:

    could you write more on balance sheet or income statement company

  • Report this Comment On August 05, 2013, at 1:36 PM, ErasmusBDragon wrote:

    This is a good list of questions, although the "sustainable competitive advantage" concept always gives me pause. Sustainable over what time period? The longer you hold (generally a good idea for individual investors) the less like the advantage will prove to be sustainable.

  • Report this Comment On August 06, 2013, at 6:53 AM, tim61950 wrote:

    Jake, good start. I'm retired now from a technical/engineering consulting company and I offer a model that we used to categorize/organize the questions that should be asked. Categorizing the questions helps to identify other questions that should be asked. Don't worry about the category you place the question into, just identify the question. These are textbook business management Environment and Resource related major category questions.

    Environment Categories - Macro Questions

    1. Physical / Technical

    2. Consumer / Market

    3. Business / Economic

    4. Social / Legal

    5. Organizational Structure

    6. Organizational Culture

    Resource Categories - Micro Questions

    1. People

    2. Funds

    3. Materials

    4. Equipment

    5. Utilities

    6. Space

    I look forward to seeing your future evaluations of companies presented in this kind of matrix.

  • Report this Comment On August 17, 2013, at 8:50 PM, BentMike wrote:

    Nice essay!

    On #7...I do that, and I worry about confirmation bias all the while. I am sorely tempted to buy more on the way up, and the bias makes it hard for me to feel confident in the choice. Sometimes I think I am better off not looking as often.

Add your comment.

DocumentId: 2574164, ~/Articles/ArticleHandler.aspx, 7/24/2014 5:41:41 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement