When I started investing 15 years ago, I was a little lost; I wasn't really confident in whether I was taking the right actions. If I could go back in time, here are the ten things I would have told my younger self -- starting with advice on picking great companies.
1. Sometimes the best investment is one you already own
Once you've built a portfolio with enough stocks to be diversified, adding a new company may not be your best use of new money. One of my favorite (and most rewarding) investments has been Amazon (NASDAQ:AMZN). Its dominant e-commerce position and constant investments to build a strong moat have made this company a tremendous investment over the last three, five, and 10 years. But once I had a position in the company, I avoided adding money, and that was a mistake. Add to your winners.
2. Don't overlook the obvious
Finding solid companies to add to your portfolio doesn't have to be that hard. The accomplished investor Peter Lynch encouraged people to buy what they know. Disney (NYSE:DIS) is an example of a Lynch-style investment that anyone can understand. For some reason, I missed having this well-known media giant in my portfolio, but my kids didn't. They've enjoyed years of market-beating returns (and bragging rights).
3. There's a reason that stock is "cheap"
Stocks that look like good values can end up being value traps. For instance, before the days of tablets, Leapfrog produced educational electronic gadgets that were safe for young kids. But as technology became less expensive, its stock price tumbled. It looked like a bargain when the management promised a turnaround. But it wasn't able to execute, and lost even more value. It was eventually bought out at a fraction of my purchase price, resulting in a significant loss for me. Similar traps lurk for unsuspecting investors, so be careful of what looks too good to be true.
4. You don't have to like the product or company to profit
Costco (NASDAQ:COST) has been a winner even in tough economic markets. I owned the stock for a time when I was a customer, but I didn't enjoy the members-only treasure-hunt shopping experience. Once my membership ran out, I sold my position too. Despite losing me as a customer and shareholder, the company grew its loyal fan base and achieved consistent market-beating results, and I missed another opportunity.
Adding great companies to your stock portfolio is only the first step. The next four lessons are about holding for the long term.
5. Selling too early is hazardous to your returns
My biggest investing mistake was cashing out of Netflix (NASDAQ:NFLX) in 2010. I had been an owner for six years, and had already achieved enviable 10-bagger returns. I was worried that my gains would disappear, so I sold some of my shares early in the year. As the stock continued its rise, I sold out of my position completely. Since then, it has gone on to gain over 1,000%. My advice to my younger self: Let your winners run.
6. Get comfortable doing nothing
In many endeavors, more work means more progress. But that's not the case with investing -- studies have shown that more activity leads to lower returns. I've always been a tinkerer when it comes to my portfolio, but my kids are the opposite and have rarely sold. Despite my best intentions, my returns have lagged theirs by several percentage points annually over the last 15 years, adding up to big differences over time.
7. The "long term" means decades
When I was a new investor, I had no concept of what "holding for the long term" meant. As I held positions for a couple of years, I started to realize the financial benefits of owning stocks. But I still wondered: How long should I hold?
The answer is different for every investor. But recently I wrote about how much you'd have if you held Southwest Airlines for over four decades; the result is mind-blowing. The longer your time horizon, the better your odds are for greater returns.
8. Have an emergency fund
During the recession of 2008-2009, I lost my job. I didn't have an emergency fund, so in order to cover our family's living expenses, I had to liquidate some stocks at market lows. Not only did I incur losses on those positions, I also missed out as these positions bounced back and beat the market over the next several years. A properly sized emergency fund would have provided a financial bridge, allowing me to avoid dipping into retirement funds.
Much of investing success is about managing your temperament. The final two tips are ways to help you stay the course even when things aren't going well.
9. Buy in thirds
Many investors have bought a stock, only to experience it losing value over the next few months. This can be really discouraging, and possibly lead to a decision to lock in your losses and sell.
To avoid purchase-price disappointment, one mind hack is to buy in thirds: Instead of investing a full portion of cash all at once, you split it into three and buy over a period of time -- maybe six months, or even a year. This way you have the best of both worlds. If the price goes down, you can celebrate the opportunity to buy more at a better price. If it goes up, you can celebrate your gains.
10. Find an investing buddy
The last piece of advice is to find others who share your passion for investing in great companies and holding for the long term. For years, I invested on my own, without anyone else to help vet my ideas. If you're in the same situation, check out The Motley Fool's message boards. The Foolish community is welcoming and always willing to answer questions from new investors, or those with years of experience. I'm certain that I could have avoided some of my mistakes if I'd had a friend who shared my interest in investing.
Despite all of my hard-learned lessons, I've achieved market-beating returns over the long term, and enjoyed the ride. If you aren't an investor yet and could use more tips, check out this article on how to start investing.