Successful Investing Summed Up in 5 Simple Rules

Doing well in finance isn’t really about memorizing financial formulas, getting certified by any of the numbers agencies that tell people you’re and expert, or even necessarily “who you .” It’s more about patience and an even-keeled personality. That’s why individuals with no formal financial or economic training can understand investing. Physicians could require a decade of school to become competent, but I ‘d bet that 90% of successful investing can be summarized with just a handful of simple guidelines.

I’ve invested a great deal of time since I began this blog writing about simple financial and investing concepts. Here are five of my favorites.

1. Wealth rarely happens quickly.

Charlie Munger, Warren Buffett’s investing partner, put it best: “You don’t have to be brilliant, only a little bit wiser than the other guys, on average, for a long, long time.”

Warren Buffett is certainly a highly skilled investor, however what makes him rich is that he’s been a fantastic investor for 7 decades. His skill may be selecting the right companies to invest in, however his real secret is time.

Understanding the time value of money is the most crucial lesson in all of finance. The single best thing we can do to improve our financial lives is to begin saving as possible.

2. A lot of monetary problems are caused by debt. (read Debt Is Slavery)

I have a buddy who earned several hundred thousand dollars a year as a specialist in a sophisticated field. He went bankrupt a couple of years ago and will most likely have to work for the rest of his life. I know another who never ever earned more than $50,000/year but retired easily on his own terms. The only genuine distinction between these 2 friends is that one made use of debt to live beyond his means while the other avoided it and accepted a reasonable standard of living.

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Saving money opens alternatives … gives you options, and allows you to be versatile. Debt removes those options. You can be a fantastic employee (or investor) and find yourself destroyed financially if you do not appreciate the power of debt.

3. Accurately forecasting any sustained stock market move is virtually impossible. 

A stock’s future returns typically will equal its income growth, plus its dividend yield, plus or minus any changes in valuations (earnings multiples). That’s actually all there is to it.

A company’s future earnings and dividends growth can be reasonably predicted.

But what about those valuation changes? There’s no chance we can possibly predict them. No way. Securities market valuations are the result of both individual’s and institutional investor’s feelings and concerns about the future. Those emotions can swing between a cheery, positive outlook and outright fear of losing everything … sometimes within the same hour. And there’s just no chance to know exactly what individuals are going to be thinking about or concerned about in the future. Exactly how could you? If somebody said, “I think 56.2% of all people will be in a 9.26% better mood in the year 2019,” we ‘d call them delusional. We might even call them Wall Street analysts. But that’s what someone  does by projecting 10-year market returns!

We know a group of top quality businesses will grow and build wealth for their shareholders over the course of time. However we can never quite be certain when attempting to predict what the stock market could do going forward. Presuming we can anticipate specifically what stocks will do in the future makes us blind to risk and unpredictability. Coming to terms with an unforeseeable future forces us to be flexible and prepared. You can probably guess which group does a better job investing.

4. Smart gets beaten by simple.

For example, someone who purchased a low-priced S&P 500 index fund in 2003 and left it alone made a 97 % return by the end of 2012. And they can have enjoyed the last 10 years at the beach, or hanging out with their children.

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At the same time, the average fancy market-neutral hedge fund — many of which are staffed with PhDs and some of the world’s fastest computers — lost 4.7% over the exact same time period, according to information from Dow Jones Credit Suisse Hedge Fund Indices. The typical stock-trading equity hedge fund produced a 96% total return — still lower than your basic index fund.

Folks, there are no points awarded for complicating your investing. Wise individuals who commit their whole lives to investing can (and regularly do) fail, yet a few of the most basic investing methods you can use are wildly effective. Good businesses run by great individuals purchased at great prices held for as long as possible. That’s it.

5. The chances of experiencing stock market volatility are exactly 100%.

Most investors understand that stocks produce superior long-lasting returns than many other vehicles, but at the expense of greater volatility. Every time there’s even a whiff of volatility in the stock market, the very same cry is heard from investors around the world: “What the heck is going on ?!”

The majority of the time, the best response is the same as always: Nothing is going on. This is normal and just what stocks do.

Beginning in 1900 the S&P 500 has actually returned about 6% annually, however the variation between any year’s highest close and lowest close is 23%. Volatility, even really extreme swings, is completely normal and should not be feared. If your portfolio dropped 20% what would you do?

The very best thing we all can do to improve our experience as investors is remind ourselves that investing might not be easy, however it’s not really all that complex. Professional investors and experts make it seem challenging because they think about it like medicine, intricate and dependent on detailed knowledge, fancy acronyms, and confusing language. It’s not.

This isn’t really rocket science. All we’re doing is spending less than we make, saving the difference, investing it in solid companies, and waiting.