I'm often reminded of why I took this job at The Motley Fool. Simply put -- I am rarely short of opinions, especially when it comes to investing. This 17-year bull run has made many individual investors feel like Peter Lynch. The last six months made them feel like, well, the opposite of Peter Lynch.
As Bill Mann pointed out in Wednesday's Fool on the Hill article, the president cannot claim responsibility for our recent economic prosperity, and the same holds true for many individual investors with regard to their investments. As Warren Buffett likes to remind us, "All boats rise in high tide."
So, what helps me stay the course with my own investing? A bit of advice from the greatest investor I have ever known -- my grandfather. Even before I began investing, he was doling out free advice to me. Here are four practices I have used.
Investors vs. speculators
"I know a lot of wealthy investors, but very few wealthy speculators," he told me. This is an underlying principle of Foolish investing and a time-honored investing mantra. However, as with most investing advice, it is easier said than done.
Digging in and holding your ground with a particular investment is only easy when the proper due diligence has been done. It all starts with homework. Avoid the impulse buy and get comfortable with the industry and company before making a purchase. Establish goals and set a few ground rules.
The Rule Maker and Rule Breaker portfolios are built around this principle. They provide the ground rules. You do the homework. These strategies force Fools to evaluate objective (quantitative) criteria as well as subjective (qualitative) criteria. They require discipline. Discipline, in turn, creates consistency. Consistency helps investors avoid emotional investment decisions and stay the course.
"Pick three periodicals and read them regularly." This is my favorite piece of advice to pass on. It is so simple, yet so strategic. These periodicals should have different perspectives and do not have to be investment-based. They can be magazines, newspapers, newsletters, or even websites. The benefits are threefold.
First, the different perspectives counter each other. Put one question to 10 economists and you will get 10 different answers. This also applies to investment pundits. Pick a few, as few as possible, and build on that foundation. You do not have to always agree with these "advisers," but believe in their principles. In fact, I would recommend following the muse of divergent advisers. This is what makes the Dueling Fools feature such a valuable tool for individual investors.
The Duel pits two Fool writers against each other, providing our readers with the bull and bear arguments for a stock or an investment-related topic. Don't let money blind you to the pitfalls of your holdings. If you are not familiar with the Duel, check out this week's Duel on Exodus Communications (Nasdaq: EXDS). Use the Duel archives as a starting point for your own due diligence.
Second, diligent reading provides new knowledge. Read the ads. Read every page. Most important, read the articles that you have no interest in reading. To expose yourself to new investment ideas, you cannot only read about the companies in which you are already invested. Look for new ideas and expand your knowledge base.
Third, rules provide discipline. Regularly reading these periodicals forces an investor to keep up with the news. Avoiding one paper or magazine for another might expose you to only one side of the story. Financial writers can be biased, and a single source of commentary might allow counter arguments to slip through your fingers, causing uninformed decisions.
The three-periodical rule creates the foundation for drilling down. Drilling down is the method of following a concept to its starting point. As you read about a company or an industry, and you do not understand something, don't just skip over it; figure it out. For example, if you are reading about the wireless industry and come across a technology you are not familiar with, find out more about it. Find out who developed it. Find out who owns it. Find out who else uses it.
In the process of drilling down, you will expose yourself to new investment opportunities related to your original investment idea. As you develop an understanding of a technology, or a product, or a strategy, you will build a confidence that allows you to make informed decisions about your investments. This knowledge base is essential to employing a long-term buy-and-hold strategy.
It is all about the time value of money. Believe it or not, the number above is the value of $100 in 100 years at 10%. That's right, $100 turns into more than a million! I still remember the crumpled up piece of paper, my grandfather pulled out of his pocket at dinner one night to make this point. At the time, I thought he was crazy. I was 10. But, I have never forgotten that number and the impact of compounding.
Sock it away early -- no matter whether it is $1 a month or $1,000 a month. The earlier you start, the quicker it grows.
Don't touch it. I know this sounds harsh, but that's how money grows. It feeds on itself. Like a virus, it multiplies and multiplies. Messing with it kills the regeneration. Pick a figure that you are comfortable you can do without. Invest it regularly, and keep your grubby little hands off it.
I look back at the investment decisions my grandfather made and say, "Not bad." I look back at the investment dates and say, "Wow." Some of his investments are older than the Beatles. I'm talking about Paul, George, and Ringo -- not the band.
Some of these ideas might seem overwhelming. How can I read a newspaper, a magazine, and an industry publication with consistency? If I look into every technology or product I don't understand, I will have to pull a Bill Gates and only sleep every other night just to make enough time.
Remember, these are suggestions, not commandments. Follow your conscience and apply your own guilt, and these ideas should help you become the individual investor you always wanted to be. Don't forget to have fun, too. Investing requires passion, and passion doesn't exist without fun.