The biggest challenge in learning how to invest is that you're never done learning. Just when you think you have some part of the financial markets or your investing strategy figured out, the rules seem to change, and suddenly certain strategies that worked so well before no longer get the job done.
In order to become a great investor, you have to recognize that you'll never be able to rest on your past achievements. As long as you have money at work in your portfolio, you have to be able to identify changes in the general investing environment and how they'll affect the particular investments you've made.
Finding tomorrow's winners
Perhaps the ultimate experience of how investing techniques cycle in and out of favor comes from looking at winning stocks over various periods of time. Many beginning investors like the idea that once they find a strategy that will work for them, they should be able to stick with that strategy throughout their investing careers. Yet all too often, if you cling too long to the same ideas, you'll overstay your welcome and end up losing much of what you gained during the good times.
Consider the tech boom of the late 1990s. During that period, all you had to do as an investor was to identify stocks that had something to do with the Internet. Whether they were legitimate companies with revenue and profit potential or sketchy dot-com businesses with little or no realistic chance of ever bringing in significant sales, Internet stocks reliably brought huge profits for millions of investors. By 1999, the general public had been trained to expect companies to come public at huge premiums to the price that lucky IPO participants had to pay.
If you'd asked someone in early 2000 which stocks were most likely to grow, just about everyone would have told you that Internet stocks were the place to put your money, as so-called "old economy" stocks were a dying breed. Yet over the next several years, some of the top large-cap performers were exactly the stocks that tech-hungry fanatics had rejected. Altria (NYSE:MO), which had been mired in cigarette litigation under threat of billion-dollar liability, soared when its worst fears didn't come to pass. Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B) recovered from its losses during the late 1990s, as those who had criticized Warren Buffett's refusal to invest in technology companies as leaving him dangerously out of touch realized it turned out to be the best possible move he could have made.
What comes around goes around
Nor is the tech bubble and subsequent bust just a cherry-picked example of this phenomenon. Countless times, investor expectations of where winning stocks would come from turned out to be completely different from what produced those winners:
- At the same time that the Internet was taking over the investing world, commodities collapsed to ridiculously low prices. Oil traded between $10 and $20 per barrel for years, and gold sank to below $275 per ounce in 1998, with investors pronouncing that commodity investments were a waste of capital. Fast-forward 10 years, and the energy industry had transformed itself, with low-cost producer Southwestern Energy (NYSE:SWN) and similar companies posting huge share-price gains along the way as a result.
- In the early 2000s, everyone saw the U.S. as the great innovator, with capacity to build high-margin businesses that produced valuable services rather than lackluster goods. Yet emerging-market economies came out of nowhere to crush the returns of U.S. stocks, and along the way, Chinese portal giant Baidu (NASDAQ:BIDU) and countless other foreign stocks went from being completely unknown in the U.S. to becoming household names among investors.
- Throughout the past several decades, investors have pointed to the bond market as being overvalued, with interest rates having nowhere to go but up. Time after time, bonds have surprised bears, clinging to substantial capital gains even as their income dwindles in the face of falling rates.
What all of these markets have in common is that cycles made them appear unattractive at certain points in time, yet they then came into their own later on. Predicting exactly when those moves will happen is difficult, but knowing that they'll happen eventually is important to remember.
The old maxim that you can't teach an old dog new tricks doesn't apply to investing. The best investors never stop learning, because the best way to find tomorrow's winners is to turn your past theories on their head and look for ideas that no one else has thought of. If you can do that, you'll have taken a big step toward becoming a better investor.
Dan Caplinger owns shares of Berkshire Hathaway. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends Baidu and Berkshire Hathaway. The Motley Fool owns shares of Baidu and Berkshire Hathaway. 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.