Author: Sean Williams | August 05, 2019
The stock market is an open textbook with boundless information
Approximately 21 years ago, when I turned 18, I dove headfirst into the investing world. But before that, I knew very little about investing... other than the fact that this Amazon.com (Nasdaq: AMZN) stock always seemed to go up.
My love for the market was fueled by a government/economics class I took as a senior in high school. With zero personal knowledge of the stock market, my classmates and I were enrolled in the Stock Market Game 2000 by our teacher. Rather than diversify, I chose to bet all of my fictitious money on a company called Oregon Metallurgical, which supplied titanium products to Boeing (NYSE: BA), a company I'd heard of maybe once or twice in my short life. Two months into the contest, Allegheny Teledyne purchased Oregon Metallurgical for what I recall was a greater than 80% premium. When I realized I could do this with real money, I was hooked, and I couldn't wait to turn 18 to begin investing with cold, hard cash.
While investing, for me, has largely been a success, it's not been without its educational moments. Here are 21 things I've learned over the past 21 years as an investor.
1. Starting somewhere is better than not starting at all
I've truly lost count of how many times I've been asked over two-plus decades how much money is needed to begin investing. The correct answer is that no amount is too small to take that first step toward your financial freedom. I began investing with $1,000 that I scraped together after working close to 60 hours a week at a summer job out of high school. There's no wrong amount to begin investing with.
2. It's OK to lose money
Early investors usually suffer from the "I'll show them" mentality by refusing to admit defeat on any of their investments. I know I was pretty stubborn when I started. But the fact is, we're all going to lose money at some point. Even the best investors in the world are only going to be right around 60% of the time. But if a handful of stocks you own gain 1,000% or more from where you bought them, do you really care that a couple of other dart throws lost 20%, 30%, or even 50%?
3. Time heals most losses
There's no doubt you'll remember some of the worst trades you've made. For me, one example would be buying Seadrill (NYSE: SDRL) before it went bankrupt. But over time, these poor decisions get put into the rearview mirror. Also, since the stock market tends to rise in value over the long run, many of my unrealized losses were turned into gains when given the proper amount of time.
4. Double-digit market declines are always a buying opportunity
Speaking of rising markets, did you know the S&P 500 (INDEX: ^GSPC) has undergone 37 stock market corrections of at least 10% (without rounding) since 1950? And did you also know that each and every one of these corrections was completely erased by a bull market rally? That's a not-so-secret code for saying that anytime a stock market correction hits, buying should eventually make you money.
5. If it seems too good to be true, it probably is
Although this bit of wisdom isn't limited to the stock market, the reality is that if something seems too good to be true, it probably is. Back in 2011, Chinese stocks were the hottest thing since sliced bread. I know, because I thought a small Chinese pharmaceutical company called Jiangbo Pharmaceuticals was far too cheap at something like five times forward earnings. I bought into Jiangbo as a speculative play, only to watch it and more than a dozen other Chinese stocks go belly up not long after.
6. You don't need to be an early bird to catch the worm
No, you don't have to wake up at 6:45 a.m. like Warren Buffett or other billionaire investors to be successful in the stock market. I'm a night owl, and I've done just fine in terms of growing my portfolio and keeping up on the latest stock market news. Pick a schedule that works for you, and don't feel that you need to sit on the edge of your seat waiting for the next news event to hit.
7. Not understanding margin is incredibly dangerous
While I am a fan of using short-selling as an investment tool from time to time, I've learned over the years just how dangerous margin can be. Not only does the risk (and reward) go up when using margin, but you'll owe interest on what you borrow. And if there's something Yours Truly despises, it's paying interest.
8. Buy what interests you
I can't state enough the importance of investing and researching sectors, industries, and companies that interest you. You're far more likely to be a successful investor if you buy into companies that get you excited. For example, I know defense contractors have been rolling in dough recently, but defense stocks are about as exciting to me as watching paint dry. Comparatively, healthcare, marijuana, and precious-metal mining interest me. Perhaps it's no surprise, then, that something like 93% of my invested money is currently in these three areas.
9. Read the other side of the story
Being an investor means taking the good with the bad. It's easy to state why you like a company, but you should also understand the downsides of any investment. No company is perfect, so in order to be a well-rounded investor, you should strive to read and understand the viewpoint of investors on the other side of your trade.
10. DRIPs are boring, but amazing
Dividend reinvestment plans, or DRIPs, aren't just for old people. Reinvesting your dividends back into more shares of dividend-paying stock may be boring, but it really is a rapid way to build wealth. Best of all, you can probably enroll in a DRIP with most of your dividend-paying stocks through your brokerage in under a minute.
11. Wall Street is fallible
Wall Street analysts are frequently put on a pedestal by investors, but they're far from perfect. Bitcoin bull Tom Lee at Fundstrat suggested that the most popular cryptocurrency in the world could easily go to $100,000 while speaking with CNBC in late November 2017. A year later, bitcoin had lost more than 80% of its value and was trading around $3,300 per token. Wall Street can be just as fallible as John and Jane Q. Investor.
12. Wall Street ratings and insider trades are often white noise
To build on this point, Wall Street ratings and price targets, as well as insider buys and sells, are mostly white noise that investors can ignore. Insiders sell stock all the time for benign reasons, such as option expirations, or to cover tax liability since most of their pay is share-based compensation. Likewise, Wall Street's rating system tends to be shortsighted and rarely has any bearing on the underlying business of a company.
13. Building wealth doesn't happen overnight
One of the toughest things to learn, having been born an investor in the dot-com age, is that wealth doesn't accrue overnight. Sure, I got lucky with a few overnight pops in my early days (thanks, Plug Power (Nasdaq: PLUG)), but most of my roulette-wheel dart throws during the dot-com era were poor choices (e.g., Webvan...yes, I bought Webvan, and no, don't remind me). Building wealth takes discipline and time, with time being the most important variable to wealth creation.
14. Short-term capital gains taxes are awful
I don't like paying taxes, and I think most people would agree with me. But I especially dislike paying a higher tax rate than I have to. Short-term capital gains, which kick in on investments held for 365 days or fewer, are taxed as ordinary income, which could mean paying as much as 37% in 2019, if you're in the top marginal tax bracket. Keep an eye on your purchase date and aim to hold stocks for at least 366 days (but preferably longer) to avoid short-term capital gains tax rates.
15. It's virtually impossible to forecast market catalysts
The stock market is going to drop again, and we will see a recession at some point. These are virtual certainties of the economic cycle. But no matter what catalysts and variables seem present, it's most often some X-factor that comes out of left field and leads to a market decline. It's perfectly fine to eye stock market catalysts, but know that predicting when and why a decline will occur is virtually impossible.
16. Next-big-thing bubbles always burst
In 21 years of investing, I've witnessed quite a few next-big-thing investments take shape. When I first began investing, it was the rise of the internet, business-to-business commerce, and human genome decoding. More recently it's been 3D-printing, blockchain, and even marijuana. What I've learned from the meteoric increases in valuation from all of these scenarios is that they're not sustainable, at least in the short term. Every industry needs time to mature, and investor expectations for next-big-thing investments always outpace that maturation cycle.
17. Irrationality can outlast your bank account
John Maynard Keynes was right, "Markets can remain irrational longer than you can remain solvent." Back in the early 2000s, I stubbornly held my short of doughnut maker Krispy Kreme, which was taken private a few years ago. I figured that no sane investor would continue paying a triple-digit price-to-earnings ratio for a company that simply made doughnuts. Boy, was I wrong. My portfolio lost half of its value during my junior year of college as Krispy Kreme's march higher simply couldn't be stopped.
18. The market and the U.S. economy aren't tied at the hip
We often think of the stock market as the perfect representation of the health of the U.S. economy, but that's not always the case. Right now is the perfect example, with the market rallying on weaker economic data and struggling when stronger growth prospects emerge. Wall Street wants lower interest rates, and the only way the Federal Reserve will oblige is if economic data and inflation figures remain weak. In short, the market and the U.S. economy aren't tied at the hip.
19. Make time for you
Investing can be a lot of fun, but make sure you make time for yourself, too. Take vacations, spend time with friends and family, and enjoy the hobbies that matter to you. I promise, the stock market will be there when you get back from whatever it is you're doing.
20. There is no finish line
Investing never really ends. There is no true finish line. Even if I manage to hit my retirement goal (in terms of dollar value saved/invested), I have no clue what my expiration date will be. That means I can't simply sit back and hope I don't outlive my savings. Rather, I now understand that I'll be an investor the rest of my life, however long that may be.
21. You're never done learning
Finally, there's always something else to learn. Whether you're Warren Buffett or picking up your first book on investing basics, there's always something new to familiarize yourself with, and always information you can be passing on to other people also eager to learn.
John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Sean Williams has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Amazon. The Motley Fool has a disclosure policy.