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Shakespeare's Timeless Lessons for Investors

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Most people would agree that William Shakespeare was the finest writer ever in the English language. Audiences and readers have been enjoying his plays for four centuries. In addition to the beautiful language and clever plots, we love his plays because they are wise.

At the The Motley Fool, we have a very special fondness for Shakespeare -- so much so that our name is derived from a line in one of his plays. The Bard has so much to teach us about everything that I thought it would be instructive to consider several quotes that might be illuminating for investors.

Lesson 1:
"There are more things in heaven and earth, Horatio,
Than are dreamt of in your philosophy."
-- Hamlet

Top investors tend to be extremely smart people who are often quite confident in their abilities. And yet, even the best investors will be wrong a lot of the time. As Peter Lynch said, "In this business, if you're good, you're right six times out of 10."

For example, the very talented value investor Whitney Tilson lost money when he recommended shorting Netflix (Nasdaq: NFLX  ) at around $178 per share in December 2010, only to close out his short position at a substantial loss after the shares went well above $225. Yet growth investors who owned both Netflix and Green Mountain Coffee Roasters (Nasdaq: GMCR  ) have been hit hard in recent months, after those two stocks lost over 50% of their value due to concerns about their future growth prospects.

Whether you are a value investor like David Einhorn or a growth investor like David Gardner, your strategy might not always be successful at any given time, and you will need to learn from your mistakes in order to sharpen your edge. In the quote above, Hamlet is telling his friend that there are lots of things in this world that are not easily explainable. None of us has all of the answers in life -- investing will make this very clear on a regular basis.

Lesson 2:
"All that glisters is not gold." -- The Merchant of Venice

In just over a decade, investors have experienced two devastating bubbles. During the tech bubble, Cisco (Nasdaq: CSCO  ) became a $500 billion company (by market cap), making it the most valuable company in the world. Still a strong business in 2011, it has a market cap of only around $97 billion nowadays.

And we're still feeling the pain of the housing bubble, which ushered in the Great Recession. In the fall of 2008, some of the biggest -- and apparently impregnable -- firms in America either failed or required a government bailout. For example, Lehman Brothers seemed to implode in a shockingly short amount of time. AIG (NYSE: AIG  ) , which was considered at one point in its history to be the bluest of blue-chip stocks, required a bailout to stay afloat.

One characteristic of bubbles is that the valuations of some stocks seem to defy reason... up until their collapse. Shakespeare captured this perfectly in The Merchant of Venice with his story of the casket lottery. The Prince of Morocco was unable to win the hand of the beautiful Portia because he incorrectly chose the gold casket instead of the less striking, but ultimately winning, leaden one. If you ever find yourself attracted to a stock solely because it just keeps going up, then you may want to reconsider buying it.

Lesson 3:
"Neither a borrower nor lender be ..." -- Hamlet

This line was part of the advice given by Polonius to his son Laertes in Hamlet. It's part of the same dialogue that included the famous line, "This above all: to thine own self be true."

We need to follow Polonius' advice more than ever today. College graduates who took out student loans owed an average of $25,250 in 2010, which was up 5% over the prior year. And we all know by now how out-of-control debt was central to the financial crisis.

In most cases, the first step on the road to being an investor is to pay off your high-priced debt. And once you begin investing, take care not to take on debt to fund your stock purchases. Warren Buffett once said, "I've seen more people fail because of liquor and leverage -- leverage being borrowed money. ... If you are smart, you're going to make a lot of money without borrowing."

Lesson 4:
"O wonder!
How many goodly creatures are there here!
How beauteous mankind is! O brave new world
That has such people in't
." -- The Tempest

This is one of my favorite quotations of all time. It was spoken by Miranda to her father Prospero, after she saw other Europeans for the first time when they washed ashore on their deserted island.

I thought of this line once when I was pushing my own daughter in a stroller when she was around 18 months old. During the walk, she kept leaning forward and looking out at everything, no matter how mundane, with the most incredible sense of wonder. For her, the whole world was new and exciting and full of possibilities. That outlook, it seems to me, is the best way for all of us to approach investing.

Despite all of the problems in the world, this is still the best time in all of human history to be alive. According to the economist J. Bradford DeLong, Americans have achieved a standard of living today that "previous generations could barely imagine." I'm fully convinced we have the knowledge to solve most of our problems today, though we often lack the ability to compromise and collaborate.

If the past witnessed remarkable new changes, the future promises equally breathtaking developments. In the not-too-distant future, we may have affordable electric vehicles from Tesla (Nasdaq: TSLA  ) and fully automated cars by Google (Nasdaq: GOOG  ) . And we may see even more rapid growth in cleaner sources of energy from a wide variety of companies pursuing different solutions. Solazyme (Nasdaq: SZYM  ) , which uses technology to convert organic material into biofuels, is just one example of a promising company in the green energy space. In so many areas -- technology, energy, medicine -- we are on the verge of incredible breakthroughs that will greatly enhance the quality of life for billions of people.

The investors' guide to Shakespeare
To briefly summarize our lessons, remember always to be humble, avoid bubbles, and stay out of debt. And no matter what, don't ever lose your sense of wonder about the world and the future. We are, after all -- as Shakespeare said -- "the stuff that dreams are made on."

If you'd like to read about a promising stock that will benefit tremendously from future trends, then have a look at our top stock for 2011. The report is entirely free and you can access it by clicking here.

John Reeves owns shares of Google. You can follow him on Twitter @TMFBane. The Motley Fool owns shares of Cisco Systems, Google, and Solazyme, and has created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Cisco Systems, Green Mountain Coffee Roasters, Netflix, and Google, as well as creating a lurking gator position in Green Mountain Coffee Roasters. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (10) | Recommend This Article (29)

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 November 21, 2011, at 3:19 PM, Merton123 wrote:

    I hope to see a similiar article during Christmas. Excellent Topic and well written !!!!!!

  • Report this Comment On November 21, 2011, at 3:33 PM, TMFBane wrote:

    Thanks for the kind words! I'll try to come up with an uplifting theme for a Christmas article!

  • Report this Comment On November 21, 2011, at 3:44 PM, PhulishMortal wrote:

    You could mention Corzine, MF Global, and "Lord, what fools these mortals be." But that would be unkind.

  • Report this Comment On November 21, 2011, at 4:47 PM, csolim wrote:

    Nice piece. I'd like to toss in my favorite - "A rose by any other name would smell as sweet." Which in the investment world I take to mean, don't accept pretty names if it doesn't pass the sniff test.

  • Report this Comment On November 21, 2011, at 5:08 PM, TMFBane wrote:

    @csolim,

    Nice to have you aboard, Kip!

  • Report this Comment On November 21, 2011, at 7:38 PM, neamakri wrote:

    Very entertaining. Thank you.

    How about some Mark Twain?

    "Suppose you were an idiot and suppose you were a member of congress. But I repeat myself."

  • Report this Comment On November 22, 2011, at 4:19 AM, lcdyers wrote:

    John reeves, this is not the best time in all human history to be alive.not by a long shot! national debt up to our nose, unemployment over 9% ,constant terror alert, and worst economy in recent memory are all added up to the worst time in last 70 years.

  • Report this Comment On November 22, 2011, at 8:41 AM, catoismymotor wrote:

    "I am but mad north-north-west: when the wind is southerly I know a hawk from a handsaw." - Hamlet

    Rush not to throw money at the market in a frenzy. Wait to invest until you have reached a decision that makes sense.

    - Cato of Verona

  • Report this Comment On November 22, 2011, at 8:42 AM, sofpan wrote:

    TSLA is an interesting company but $3.31 billion Market Cap?

    Price/Sales: 16.47x ?

    Price/Book: 11.25x ?

    Looks like a bubble on a nice story.

  • Report this Comment On November 22, 2011, at 8:58 AM, TMFBane wrote:

    Thanks for the additional comments, everyone.

    @neamakri,

    Here's a similar Twain quote, "America is a nation without a distinct criminal class...with the possible exception of Congress."

    @lcdyers,

    I can see how you might think things aren't great right now. But remember, 70 years ago, Hitler had just invaded the Soviet Union, which resulted in tens of millions of deaths. By comparison, Europe's problems today look like a Sunday picnic.

    In any event, I was deliberately avoiding the macro view -- which always looks a bit muddled. Instead, think of medicine. If you or someone you know was sick, would you rather see a doctor today or 70 years ago? That same approach applies to lots of other issues too -- from a purely material point of view, human beings in America, Europe, Asia, etc are clearly better off.

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John Reeves
TMFBane

John is a senior editor focusing on investigations and financial reform. He's been with the Fool for almost ten years.

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