When it comes to investing, there aren't many certainties, save for the fact that when we first dip our toes into the pond we aren't very experienced. Some people are lucky enough to have studied the stock market rigorously for years before buying their first stock, but every investor is wet behind the ears at some point in their life.
I freely admit that roughly 15 years ago, when I first started "dabbling" in the stock market, I made a number of mistakes. Of course, at the time, I didn't consider them mistakes, but I really didn't have the hands-on experience to know better. As I look back on a few questionable decisions I made in my very late teens and early 20s, I'm left with only one thought: "I wish I'd known then what I know now!"
Though I lack the flux capacitor or DeLorean a la Back to the Future that would be capable of going back in time to rectify some of my mistakes, I do have the ability to tell you my story, so perhaps you can learn from my common mistakes and not repeat them if you're a relatively new investor, or an investor who's been thinking about buying into the stock market for the first time ever.
Here are the top three investing lessons I wish someone had taught me 15 years ago.
The value of a dollar
If there's one thing young adults know very little about, it's the value of a dollar. Many young adults readying to invest for the first time ever have probably only held a job for a few years, so their ability to manage money and handle responsibility is still being refined. This money management education process often leads to young adults saving very little of their income early in life. From going out with friends, to paying student loans and rent, there's rarely the time or energy left over for saving money.
When I was young, I certainly wasn't thinking about retirement. I was thinking about how I was going to earn $450 each week driving a shuttle bus on my college campus, and what really cool things I could buy with that $450. I also didn't think for a moment what the retirement contribution from this job might do for me when I hit my retirement age. Instead, when I left that job, all I could think about is how great it was going to be to have $2,400 in my pockets.
But, here's the problem: I didn't know the true value of a dollar when I took this retirement money out, and I may have cost myself a lot in future gains.
You see, the biggest investment gains are made over the long term thanks to compounding returns. By buying and holding equities for long periods of time, you keep your emotions from coming into play and ensure you don't miss the markets' biggest gains. Considering that the stock market has historically averaged an 8% return per year, that $2,400 I pulled out of my retirement account to spend 13 years ago could have been worth $70,934 by the time I turned 65.
Long story short, I fully understand the value of a dollar now.
It's OK to be wrong
When you're in your teens or 20s, you generally have a feeling of invincibility. Young adults, relative to other age groups, tend to be risk takers in both life and with their money. With regard to finances, the premise is that a younger adult should be more willing to take financial risks while young since they have decades to correct a potentially bad investment.
However, many new and young investors (and I'm throwing my late-teen and early 20s self in with this crowd) have an "invincibility" issue when it comes to investing. Because time is on our side, and we feel as if we can have the world in the palm of our hands, it's difficult to admit that we can be wrong. Speaking personally, instead of cutting my losses on a handful of investments in my college years following clear negative changes to the underlying business model of some of my investments, I decided to hold on because I was too prideful to take the loss. Not surprisingly, those small losses quickly turned into big red blotches that -- in a few cases -- wound up with me losing all of my money.
The lesson here is that it's perfectly OK to be wrong and lose money on a stock (despite Warren Buffett proclaiming his only rule is not to lose money) if the business fundamentals have changed. The fact of the matter is, you aren't always going to be right, and the quicker you accept that fact, the better the investor you will become.
Perhaps the best aspect of investing is that you don't even need to be right a majority of the time. As long as you allow your best-performing stocks to continue running higher, you have the opportunity to handily cancel out your money-losing investments.
There's more to value than a P/E ratio will tell you
Lastly, when I first started investing about 15 years ago, I studied the basics of value investing. Being the numbers guy that I am, I honed in on valuation metrics galore, including P/E ratios, price-to-book values, and PEG ratios. Being young and naive, I figured there could be no way I'd ever be wrong if I simply picked out businesses with favorable valuation metrics.
But, I found out the hard way that it was pretty easy to be wrong if I based my investment on a few key statistics.
Instead of blindly buying into a stock because it had a low P/E, I wish I'd been taught that the inner workings of the underlying business model are much more important than its valuation.
Don't get me wrong -- financial metrics do help us sort out the heavily indebted, money-losing companies from potentially great companies. However, intimately understanding what makes a company tick and whether its business model is sustainable over the long term is what separates market-performing gains from market-outperforming ones. This is one of the reasons Amazon.com, Priceline, Walt Disney, and Netflix(NASDAQ:NFLX) have been such incredible stocks for The Motley Fool and its Stock Advisor service, and why some members have seen their investment returns soar above 1,000% to nearly 5,000% in some instances. These are innovative businesses with a competitive edge over their peers that has allowed them to deliver huge gains over the past decade-plus to investors.
You never stop learning
If there's an addendum to these key takeaways, it's that you never stop learning and growing as an investor. Mistakes are going to happen, plain and simple. But, rather than hiding behind those mistakes, you should instead reflect on them and use them to your advantage so you can ultimately grow as an investor.