If you're interested in learning about investing, the best way to start is by reading the classics. This is what I spent the last few weeks doing (in some cases, rereading them), and I can't say enough about the trove of wisdom that's been shared over the years by the greatest speculators and investors in history.
Perhaps most interesting are the themes that recur time and again. Beginning with the years before the Civil War, when the stock market was formalized, it seems the history of investing has been on a single, continuous loop; the names of the characters change, but their roles and the underlying plot remain the same.
When I say "classics," I'm referring to five books in particular:
- Fifty Years In Wall Street by Henry Clews, the "Sage of Wall Street" in the decades after the Civil War.
- Reminiscences of a Stock Operator, a "fictional" work that is in fact a thinly veiled biography of Jesse Livermore, the "Boy Plunger of Wall Street" who won and lost half a dozen fortunes during the Gilded Age.
- Baruch: My Own Story by Bernard Baruch, a Wall Street legend who was later a central player in many of the greatest international political developments of the 20th century.
- The Intelligent Investor by Benjamin Graham, the father of modern value investing and, perhaps most notably, the inspiration behind Warren Buffett's original investment philosophy.
- Common Stocks and Uncommon Profits by Philip Fisher, the father of modern growth investing who, like Graham, served as a central influence on Buffett's later multifaceted approach to investing.
What can we learn from books like these that have stood the test of time? While I catalogued countless lessons reading through them, the 26 pieces of wisdom shared below are, in my opinion, the most important:
1. History repeats itself on Wall Street.
Livermore: History repeats itself all the time in Wall Street.
Clews: The maxim that history repeats itself has been fully verified in Wall Street.
Graham: No statement is more true and better applicable to Wall Street than the famous warning of Santayana: "Those who do not remember the past are condemned to repeat it."
2. Investing is not easy (and those who say it is are generally self-serving). You need to know what you're doing.
Baruch: Success in speculation requires as much specialized knowledge as success in law or medicine or any other profession. It never would occur to anyone to open a department store in competition with Macy's or Gimbel's or to make motor cars against Ford and General Motors without prior training or preparation. Yet the same man will cheerfully toss his savings into a market dominated by men who are as expert in their line as Macy's and the auto makers are in theirs.
Livermore: The one game of all games that really requires study before making a play is the one he goes into without his usual highly intelligent preliminary and precautionary doubts. He will risk half his fortune in the stock market with less reflection than he devotes to the selection of a medium-priced automobile.
Graham: In an astonishingly large proportion of the trading in common stocks, those engaged therein don't appear to know -- in polite terms -- one part of their anatomy from another.
3. You have to be humble.
Clews: All these reminiscences of the ups and downs of Wall Street will serve to remind my readers that, while it is often easy to make money, it is still easier to lose it. Therefore, boldness should be always tempered with caution in the pursuit of the Almighty Dollar in Wall Street.
Livermore: I sometimes think that no price is too high for a speculator to pay to learn that which will keep him from getting the swelled head. A great many smashes by brilliant men can be traced directly to the swelled head -- an expensive disease everywhere to everybody, but particularly in Wall Street to a speculator.
4. Beating the market is very hard.
Graham: Since anyone -- by just buying and holding a representative list -- can equal the performance of the market averages, it would seem a comparatively simple matter to "beat the averages"; but as a matter of fact the proportion of smart people who try this and fail is surprisingly large.
Livermore: I have said many times and cannot say it too often that the experience of years as a stock operator has convinced me that no man can consistently and continuously beat the stock market though he may make money in individual stocks on certain occasions.
5. The market is unforgiving and parcels out rewards based on objective, not subjective, criteria.
Livermore: They say there are two sides to everything. But there is only one side to the stock market; and it is not the bull side or the bear side, but the right side.
6. In other words, the stock market isn't there to oblige you.
Baruch: The main reason why money is lost in stock speculations is not because Wall Street is dishonest, but because so many people persist in thinking that you can make money without working for it and that the stock exchange is the place where this miracle can be performed.
Livermore: There isn't a man in Wall Street who has not lost money trying to make the market pay for an automobile or a bracelet or a motor boat or a painting. I could build a huge hospital with the birthday presents that the tight-fisted stock market has refused to pay for. In fact, of all hoodoos in Wall Street I think the resolve to induce the stock market to act as a fairy godmother is the busiest and most persistent.
7. Never trust forecasts.
Fisher: I believe that the economics which deal with forecasting business trends may be considered to be about as far along as was the science of chemistry during the days of alchemy in the Middle Ages.
Graham: The future of security prices is never predictable.
8. Always expect the unexpected.
Livermore: Among the hazards of speculation the happening of the unexpected -- I might even say of the unexpectable -- ranks high.
9. Always be prepared for a downturn.
Clews: There has hardly been a year within my recollection, going back nearly thirty years, when there have not been two or three squalls in "the Street," during the year, when it was possible to purchase stocks below their intrinsic value. The squall usually passes over in a few days, and then the lucky buyers of stocks at panic prices come in for their ranging from five to ten percent on the entire venture.
10. Don't try to identify market tops and bottoms. It isn't possible.
Baruch: Some people boast of selling at the top of the market and buying at the bottom -- I don't believe this can be done except by latter-day Munchausens.
11. Don't buy hot stocks or invest in IPOs.
Graham: An elementary requirement for the intelligent investor is an ability to resist the blandishments of salesmen offering new common-stock issues during bull markets. Even if one or two can be found that can pass severe tests of quality and value, it is probably bad policy to get mixed up in this sort of business.
12. When it comes to investing, you are your own worst enemy.
Baruch: In speculation, our emotions are constantly setting traps for our reasoning powers.
Graham: The investor's chief problem -- and even his worst enemy -- is likely to be himself. This has proved the more true over recent decades as it has become more necessary for conservative investors to acquire common stocks and thus to expose themselves, willy nilly, to the excitement and the temptations of the stock market.
Livermore: The speculator's chief enemies are always boring from within. It is inseparable from human nature to hope and to fear. ... The successful trader has to fight these two deep-seated instincts. He has to reverse what you might call his natural impulses. Instead of hoping he must fear; instead of fearing he must hope.
Clews: There is no mental discipline more severe and exacting than that of speculation. There is no pursuit in which a man can less afford to indulge in whims, or prejudices, or pet theories, than that of stacking his money against the prospective changes in financial values. He must be as calm and as impartial as a judge, not less in respect to the risks he incurs than in regard to the integrity of his own judgment.
13. This is why temperament is more important than intelligence.
Graham: We have seen much more money made and kept by "ordinary people" who were temperamentally well suited for the investment process than by those who lacked this quality, even though they had an extensive knowledge of finance, accounting, and stock market lore.
Baruch: The constant problem of the speculator or analyst is how to disentangle the cold, hard economic facts from the rather warm feelings of the people dealing with these facts. Few things are more difficult to do. The main obstacle lies in disentangling ourselves from our own emotions.
14. As a result, it's critical to insulate your decisions from your emotions.
Clews: For a man to be a thoroughly equipped speculator, it is necessary that he be possessed of extraordinary parts and attainments. He must be an unceasing and intelligent observer of events at large, and a sagacious interpreter of symptoms on the Exchange; his judgment must be sound, not only as to existing conditions, but as to coming tendencies; and he must possess the calmness and nerve to face unflinchingly whatever emergencies may arise.
Graham: While enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.
15. Focus instead on the objective facts.
Baruch: In the search for facts I learned that one had to be as unimpassioned as a surgeon. And if one had the facts right, one could stand with confidence against the will or whims of those who were supposed to know best.
16. And think for yourself.
Livermore: It cost me millions to learn that another dangerous enemy to a trader is his susceptibility to the urgings of a magnetic personality when plausibly expressed by a brilliant mind.
Baruch: Over the long run, I have found it better to rely on one's own cold detached judgment of the economic facts.
17. In other words, don't rely on tips or "inside" information.
Baruch: The longer I operated in Wall Street the more distrustful I became of tips and "inside" information of every kind. Given time, I believe that inside information can break the Bank of England or the United States Treasury.
Livermore: The public should beware of explanations that explain only what unnamed insiders wish the public to believe.
Fisher: Allowing the general wording and tone of an annual report to influence a decision to purchase a common stock is much like buying a product because of an appealing advertisement on a billboard. The product may be just as attractive as the advertisement. It also may not be.
18. Or on the financial media.
Clews: The object of [financial news] agencies is a useful one; but the public have a right to expect that when they subscribe for information upon which immense transactions may be undertaken, the utmost caution, scrutiny, and fidelity should be exercised in the procurement and publication of the news. Anything that falls short of this is something worse than bad service and bad faith with subscribers; it is dishonest and mischievous. And yet it cannot be denied that much of the so-called news that reaches the public through these instrumentalities must come under this condemnation.
19. Instead, focus on finding great companies.
Fisher: [A study of the past indicates that] the greatest investment reward comes to those who by good luck or good sense find the occasional company that over the years can grow in sales and profits far more than industry as a whole. It further shows that when we believe we have found such a company we had better stick with it for a long period of time.
20. As a corollary, don't invest in mediocre companies.
Fisher: I believe that the greatest long-range investment profits are never obtained by investing in marginal companies.
Fisher: It is by no means impossible to make a fair one-time profit from companies with a stationary or even a declining sales curve. Operating economies resulting from better control of costs can at times create enough improvement in net income to produce an increase in the market price of a company's shares. This sort of one-time profit is eagerly sought by many speculators and bargain hunters. It does not offer the degree of opportunity, however, that should interest those desiring to make the greatest possible gains from their investment funds.
21. When you come across an opportunity, don't be afraid to act.
Baruch: I have heard many men talk intelligently, even brilliantly, about something -- only to see them proven powerless when it comes to acting on what they believe. ... There are some problems on whose solution we must wait for the workings of time. But with many other problems inaction is the worst possible course.
Livermore: A man may know what to do and lose money if he doesn't do it quickly enough.
22. But when you do act, do so judiciously.
Livermore: There is the plain fool, who does the wrong thing at all times everywhere, but there is the Wall Street fool, who thinks he must trade all the time. No man can always have adequate reasons for buying or selling stocks daily or sufficient knowledge to make his play an intelligent play.
Livermore: The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among the professionals, who feel that they must take home some money every day, as though they were working for regular wages.
23. When building a position in a stock, however, don't do it all at once.
Baruch: When I struck a line of speculation that my judgment told me was going to turn out well, I would buy stocks or bonds to the limit of my resources. Some market fluctuation would come along and swamp me. Only after this happened again and again did I learn the lesson of not overplaying my hand and of always holding back some part of my capital as a reserve. Had I learned this earlier I would have saved myself many a heartache in going broke again and again.
24. Always keep a cash reserve in order to exploit unexpected opportunities.
Baruch: No general keeps his troops fighting all the time; nor does he go into battle without some part of his forces held back in reserve. After my first youthful reverses were behind me, I tried never to go into any speculation over my depth -- beyond my financial capacity to pay for any error of judgment. By maintaining a large cash reserve, I have also been in a position to take advantage of unforeseen opportunities as they developed.
25. And take advantage of time, which is the individual investor's greatest ally.
Fisher: A basic investment principle which by and large seems only to be understood by a small minority of successful investors ... is that once a stock has been properly selected and has borne the test of time, it is only occasionally that there is any reason for selling it at all.
Livermore: It never was my thinking that made the big money for me. It always was my sitting. Got that? ... Men who can both be right and sit tight are uncommon. I found it one of the hardest things to learn. But it is only after a stock operator has firmly grasped this that he can make big money.
26. Finally, you have to recognize and study your mistakes (even though most people don't want to admit them).
Livermore: A man can excuse his mistakes only by capitalizing them to his subsequent profit.
Fisher: While losses should never cause strong self-disgust or emotional upset, neither should they be passed over lightly. They should always be reviewed with care so that a lesson is learned from each of them. If the particular elements which caused a misjudgment on a common stock purchase are thoroughly understood, it is unlikely that another poor purchase will be made through misjudging the same investment factors.
Baruch: I began a habit I was never to forsake -- of analyzing my losses to determine where I had made my mistakes. This was a practice I was to develop ever more systematically as my operations grew in size. After each major undertaking -- and particularly when things had turned sour -- I would shake loose from Wall Street and go off to some quiet place where I could review what I had done and where I had gone wrong. At such times I never sought to excuse myself but was concerned solely with guarding against a repetition of the same error.
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