14 Thoughts That Changed How I Think About Investing

Wisdom from smart people.

Jun 25, 2014 at 11:00AM

A smart sentence can teach you more than some books. Here are 14 that totally changed how I think about investing. 

"In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves." -- Erik Falkenstein

Most investors assume they're average and attempt to become above average. In reality, they're far below average (or the market's average return) and should put all their effort into working their way to par. 

"When you first start to study a field, it seems like you have to memorize a zillion things. You don't. What you need is to identify the core principles -- generally three to twelve of them -- that govern the field. The million things you thought you had to memorize are simply various combinations of the core principles." -- John Reed

There are only four or five things you need to understand about finance. Everything else is fine-tuning around the edges. 

"Timing the market is a fool's game, whereas time in the market is your greatest natural advantage." -- Nick Murray

There is nothing more important in investing than the amount of time you can invest for. It's also one of the most discounted and ignored traits. 

"Risk is what's left over when you think you've thought of everything." – Carl Richards

This is the best definition of risk I've come across. Most things we worry about aren't risky specifically because we're worrying about them. It's the stuff no one is thinking about that poses the biggest threat. 

"It is remarkable how much long term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent." -- Charlie Munger

This is similar to Erik Falkenstein's quote. Trying to be smart can be dangerous. There is more ground to gain by being less dumb than your competitors.  

"No one can foresee the consequences of trivia and accident, and for that reason alone, the future will forever be filled with surprises." -- Dan Gardner

You must come to terms with the reality that some things are impossible to forecast. Most things, actually. 

"Men resist randomness, markets resist prophecy." -- Maggie Mahar

See above. 

"My conceptual framework, which basically emphasizes the importance of misconceptions, makes me extremely critical of my own decisions. I know that I am bound to be wrong, and therefore am more likely to correct my own mistakes." -- George Soros

Skepticism bordering on paranoia is the healthiest attitude to have when making big investment decisions.  

"Read 500 pages [of books, magazines, reports, etc.] every day. That's how knowledge works. It builds up, like compound interest. All of you can do it, but I guarantee not many of you will do it." -- Warren Buffett

The fact that not many of us will do it is why not many of us are smart or successful. 

"To better avoid errors, you should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are." -- Daniel Kahneman

Most of what people consider "research" is just an attempt to confirm what they already believe. The only research that counts is the kind that hurts to think about. 

"When a possibility is unfamiliar to us, we do not even think about it." -- Nate Silver

Everything that has ever happened was unprecedented at one time. 

"You never know what the American public is going to do, but you do know they will do it all at once." -- Bill Seidman

This is why bubbles happen. People assume they can think for themselves, but safety in numbers is far more appealing.  

"A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not easily distinguishable from the truth." -- Daniel Kahneman

This is why people read and listen to the same pundits who say the same thing all day long. 

"Acknowledging what you don't know is the dawning of wisdom." -- Charlie Munger 

You are exponentially dumber than you think you are. 

Good luck. 

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics. 

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