Modern Investing Proverbs

At the Freakonomics blog the other day, I ran across a request from Fred Shapiro of the Yale Book of Quotations for "modern proverbs." In reviewing his little list of samples, I found that they offered some investing insights. For example:

"It takes a village to raise a child."
Our Motley Fool CAPS service is much like an investing village, where tens of thousands of participants are rating stocks and commenting on them. Where else can you quickly put your finger on the pulse of the stock market (except for, well, the stock market itself), and better still, get the thoughts of those whose predictions have proven most accurate? As we've demonstrated in Fooldom and its discussion boards over more than a decade, it can really help your investing to gather information from a village of investors.

"The customer is always right."
Many successful companies are praised for treating their customers well. As I pointed out in a previous article, companies recently singled out for this include L.L. Bean, Amazon.com (Nasdaq: AMZN  ) , Nordstrom (NYSE: JWN  ) , and Netflix (Nasdaq: NFLX  ) .

The people speak ...
Many people answered Shapiro's call for proverbs, offering these, among others:

"You get what you pay for."
We often deserve what we get when we invest. Just as people spend money on lottery tickets in an almost hopeless attempt to get rich quick, people bet on unknown penny stocks, buying 10,000 shares for $700 and then watching their investment disappear. But they got what they paid for: some shares of a company with no proven track record, no profitable sales, and little more than a few rhapsodic press releases.

"Your mileage may vary."
Sure, the stock market's average annual gain has been around 10% over many decades. But that doesn't mean that you will earn 10% over your personal investing time frame of the 37 years between 1983 and 2020. You may average 7%, or 13% or some other percent. Don't count on any particular return, if you're investing in stocks. They tend to offer significantly higher returns, on average, than do bonds and other alternatives, but they also include at least a little more risk.

"When all you have is a hammer, everything looks like a nail."
New investors frequently have learned how to crunch or understand a number, such as a price-to-earnings (P/E) ratio, and then will look at just that. If they read about a pharmaceutical company like Merck (NYSE: MRK  ) or Pfizer (NYSE: PFE  ) , they'll look up its P/E, and think favorably about the company if it's low. They won't look at its drug pipeline, or how drugs coming off patent protection in the near future may threaten cash flow. It won't matter to them if a company has been taking on a lot of debt, or has shrinking profit margins.

"You've got to know when to hold 'em and know when to fold 'em."
Too many people sell when they shouldn't, and then don't sell when they should. There are several good reasons for selling: selfish management, competitive disadvantages, and an unstable financial model, for instance. It can also be smart to sell if you really don't understand a company, if you have found a much more promising place to move your money (taking into consideration the tax hit you might face), or if the company has changed so that the reasons you bought in the first place are no longer valid.

"If you can't beat 'em, join 'em."
Finally, consider this one. It makes me think of index funds, because the vast majority of managed mutual funds, run by smart people on Wall Street, just can't beat the overall market's return. Given that, why not just be average, and earn the market's return? It makes sense -- and even Warren Buffett has recommended index funds to the masses.

Of course, if you still want to try to beat the market, go ahead. One way is by carefully selecting top-notch managed mutual funds, those that do outperform the market regularly. We'd love to introduce you to some, via our Motley Fool Champion Funds newsletter. A free trial includes full access to all past issues, so you can read about each recommendation in detail.

Longtime Fool contributor Selena Maranjian owns shares of Netflix. Netflix and Amazon.com are Motley Fool Stock Advisor recommendations. Pfizer is a recommendation of Income Investor and Inside Value. The Motley Fool is Fools writing for Fools.


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