My love for the stock market and investing was born nearly 26 years ago, when I was a high school senior. That was the year my classmates and I were enrolled in The Stock Market Game 2000 by our government/economics teacher.
With virtually no understanding of how the stock market worked, our class was split into teams of four and each given $100,000 in fictitious money to invest. Whereas some teams democratically invested their $100,000, my team broke its allotment into quarters, so we all could do as we wished with our $25,000. I recall plowing my $25,000 into a small airplane parts manufacturer, Oregon Metallurgical. Two months later, Oregon Metallurgical was acquired by Allegheny Teledyne, now known as ATI. All told, my fictitious $25,000 soared nearly 90% in a matter of months. When I realized I could do this with real money, I was hooked.
It's been about 25 years since I opened my first online brokerage account. While there have certainly been bumps along the way, it's mostly been an enjoyable ride. Here are 25 things I've learned as an investor over the past 25 years.
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1. Get your finances in order before you invest
One of the most important things you can do before buying your first stock is ensuring that you won't need the money you invest to pay bills, cover emergencies, or service debt. There's nothing worse than the feeling of having to sell stock at a potentially inopportune time because you need to money to pay a bill or cover an emergency expense. Once you have your emergency fund in place, you're ready to invest.
2. There's never a bad time to start investing
Consistently, the toughest hurdle new investors struggle with is the notion that they've either missed the boat or don't have enough money to invest. The reality is that there's never a bad time to start investing. "Now" is always a great time to put money to work on Wall Street, assuming you have an emergency fund in place.
3. Wall Street is freer and fairer than ever for everyday investors
There's zero question that Wall Street is freer and fairer for everyday investors than ever before. Most online brokerages have done away with commission fees and minimum deposit requirements. Some even allow for fractional-share purchases. Likewise, investors can access company filings, management commentary, and valuation metrics at the click of a button.
4. You can invest on your own schedule
The "early bird' may catch the worm, but a night owl like myself prefers to sleep in. A quarter of a century on Wall Street has taught me that you can invest on your own schedule. Thanks to limit orders and after-hours trading, there's no need to sit in front of a computer monitor for 6.5 hours Monday through Friday to watch every tick.
5. Always have dry powder at the ready
It's also a good idea to always have cash available that can be put to work. Stock market crashes can happen in the blink of an eye and create phenomenal buying opportunities in amazing businesses. You'll probably never regret having some extra cash handy.
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6. Know your numbers
It's imperative to know your numbers if you're an investor. Note, I'm not saying you have to work out discounted cash flow models for the companies you're considering investing in. Rather, you should have a good grasp of the numbers found on an income statement and balance sheet. Knowing a couple of core numbers can go a long way toward making an informed investing decision.
7. Margin is a big no-no
Using margin to leverage the size of a position is a big no-no. Although it can magnify your gains if you correctly choose the direction a stock will head, it can just as easily lead to outsize losses. While there are some situations where margin is often necessary, such as short-selling a stock, the potential for larger losses and the interest you'll owe your broker are major red flags.
8. Short-term capital gains stink
Making money in the stock market is great. Paying tax on your capital gains, not so much. But there's a huge difference between short-term (365 or fewer days held) and long-term (366 days or more held) capital gains. Whereas long-term capital gains peak at 20% (not counting the possibility of being hit by the net investment income tax), short-term capital gains are taxed at ordinary federal rates -- as high as 37%. I do what I can to avoid short-term capital gains taxes.
9. You're going to be wrong
The most-difficult thing to learn and accept as an investor is that you're going to be wrong. Even the best investors tend to be right only around 60% of the time. The interesting thing is that you could be wrong far more often than you're right and still make a boatload of money on Wall Street. The secret is simply allowing your winners to run.
10. Wall Street analysts are fallible and often reactive
Wall Street's brightest minds are going to be wrong, too. Wall Street analysts are just as fallible as retail investors. In fact, price target adjustments from Wall Street analysts tend to be reactive (i.e., in response to news events or a big move in the share price of a covered company) more often than proactive.
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11. It pays to listen to alternate viewpoints
With the understanding that you're going to be wrong, it pays to listen to alternate viewpoints. Every single stock in the Dow Jones Industrial Average (^DJI 0.40%), S&P 500 (^GSPC 1.02%), and Nasdaq Composite (^IXIC 2.02%) has flaws and headwinds they're contending with. The better you understand how the opposition feels about a company, the more informed you'll be when making an investment decision.
12. Markets can stay irrational longer than you can stay solvent
In the words of John Maynard Keynes, "Markets can remain irrational longer than you can remain solvent." Confidence and momentum are powerful tools on Wall Street, which means valuations won't always make sense. I know this firsthand, considering I took a nearly 100% loss during my college years by short-selling Krispy Kreme and its otherworldly valuation, which took years to deflate.
13. The stock market and the U.S. economy aren't the same thing
Another lesson learned over 25 years is that the stock market and the U.S. economy aren't tied at the hip. While the health of the U.S. economy should, in theory, coincide with moves higher and lower for equities, investors tend to be forward-looking. For instance, even with U.S. recessionary fears heightened, the Dow, S&P 500, and Nasdaq Composite are all at or near 52-week highs.
14. If it sounds too good to be true, it probably is
Wall Street and everyday investors are very good at spotting value. Chances are that if something looks too good to be true, it probably is. For instance, companies generally can't sustain dividend yields in excess of 20%. When ZIM Integrated Shipping Services kicked 2023 off with an annualized yield of around 70%, that was a clue that things were too good to be true. ZIM has since completely shelved its payout.
15. Optimism pays on Wall Street
While there's absolutely nothing wrong with being skeptical or even being bearish over the short run, optimism is what makes the vast majority of investors richer over time. For instance, there have been 39 double-digit percentage corrections in the S&P 500 since the start of 1950. With the exception of the 2022 bear market, all 38 previous dips were eventually cleared away by a bull market rally.
16. Time is your biggest ally
One of the most important lessons I've learned is that time is the greatest ally you'll have on Wall Street. In addition to wiping away the evidence of previous corrections, crashes, and bear markets, time can make investors richer. Based on data from Crestmont Research, if you, hypothetically, purchased an S&P 500 tracking index at any point since the start of 1900 and held that position for 20 years, you generated a hearty positive total return, including dividends, every single time.
17. You don't have to beat the indexes to build wealth
There's a natural desire for most investors to outperform Wall Street and the S&P 500. But you don't have to beat Wall Street to build significant wealth. Simply matching the performance of the indexes has resulted in long-term total returns in the high single digits. In other words, mirroring the performance of the S&P 500 over the long run can double your money, on average, every 10 years or less.
18. History has a way of rhyming on Wall Street
Though it pays to be patient, it's also worth pointing out that history has a way of rhyming on Wall Street. Over the past six months, I've noted more times than I can count how certain economic indicators and metrics have an uncanny ability to predict the directional moves in the Dow Jones, S&P 500, and Nasdaq Composite. While time is still an investors' closest ally, these indicators and metrics can provide an edge to investors who follow them.
19. Portfolio concentration can be powerful
To take a page out of Warren Buffett's book, portfolio concentration can be a powerful thing. Don't get me wrong: I enjoy putting my money to work in dozens of companies (I currently have stakes in 47 businesses). However, I'm a firm believer that your best ideas should account for a sizable percentage of your invested assets. All it takes is for one or two of these top ideas to succeed over the long run and you'll be building some serious wealth.
20. Dividend stocks can be a gold mine
When I began investing a few years before the dot-com bubble, I was solely focused on growth names and thought dividend stocks were for retirees. After 25 years of putting my money to work on Wall Street, I see how important income stocks can be and what a dividend reinvestment plan (DRIP) can do for a portfolio. It also doesn't hurt that dividend stocks have vastly outperformed non-payers over multiple decades.
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21. Invest in what interests you
It's imperative to invest in businesses, industries, and sectors that interest you. For example, defense stocks and chemical companies may be highly profitable, but simply typing out "defense stocks and chemical companies" is putting me to sleep. Buying stakes in companies, industries, sectors, and trends that interest you will make it easier to keep up on the catalysts and headwinds that matter.
22. Next-big-thing bubbles always pop
Without fail, there's always a next-big-thing trend or investment captivating the attention of Wall Street and investors. Right now, it's artificial intelligence (AI). But if there's a common theme with next-big-thing investments, it's that investor expectations always outpace early stage uptake and demand. Whether we're talking the internet, genome decoding, business-to-business commerce, 3D printing, cannabis, blockchain, or the metaverse, next-big-thing investment bubbles always, eventually, pop.
23. Take time for yourself
The stock market is a great wealth-building tool. But you know what's even better? Your family, friends, vacationing, your favorite hobby, and so on. It's important to take time for yourself every so often. The stock market will be there when you get back.
24. You'll never know it all
Another thing that 25 years of investing teaches you is that you'll never understand everything and there's always something new to learn. If you're a willing student and crave knowledge, Wall Street regularly doles out lessons.
25. Investing has no finish line
Last but not least, 25 years has taught me that the retirement "finish line" is a myth. Since we (thankfully) don't know when our time is up, and goods and services continue to get pricier over time, the need to invest is a lifelong venture. Though your investing strategy later in life will probably be far different than it was when you were in your 20s, there is no set finish line.
