3 Common Lies of Investing in Stocks
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In this post we will talk about the most common lies about the stock market and investing that the majority of people actually believe and that keep them poor.
There are many myths about investing that can often scare off individual investors and make them wonder if investing is even worth learning. In this article we will go over the top three of those myths. These are pretty common investing lies that the majority of people are taught to believe.
Lie number one is that you have to be an expert to manage money. In reality this is one of the worst things you can do to yourself, it is to believe that the so-called experts know more than you do. One of the biggest myths there is that it is hard to invest and it should be left to the experts. While in reality you do not have to be an expert. In fact you just have to be an expert in one small part of the market. It is called to be an inch wide and a mile deep in this one area. You simply pick a part of the market you are already interested in by virtue of hobbies, passions, expertise, the work you do, where you shop, any of those things. You simply pick that part of the market and dive in. It is that simple, just pick the market you are interested in, dig deep, so you can expand into enough companies to analyze and choose from. Once you are a mile deep in that one chosen little area, you can put a reasonable value on many of the companies in that industry and then it is just a matter of time to wait patiently until the normal market fluctuations will bring you a great company at a great price.
The key is you just have to be patient and do your reading.
Look, even Warren Buffett does not pretend to be an expert in the whole market. Him and his partner Charlie Munger said that they have an edge over most professional fund managers because they know what they know and they know what they do not know. Then they stick to what they know and that leads to success. Interesting fact that almost no other professionals do that, most of them do not even try. For example Warren's portfolio is mostly invested in just a few companies. He just focuses on what he knows and sticks to it religiously, and you can do it too.
Moving on to investing lie number two, you cannot beat the stock market. In all reality this is probably the number one thing that keeps people from investing on their own. A lot of people really think that they cannot beat the market. The truth is if you do your homework and analyze a single slice of the market then you can achieve great success.
The biggest reason why you personally can outperform many mutual fund and pension fund professionals is that they are big and you are little. The size discrepancy gives us an enormous advantage. Warren Buffett once said that if anybody's telling you that size does not matter than investing they are trying to sell you a mutual fund. The big guys run big funds and the total dollars makes them very illiquid. Meaning it is hard to get in and out at one price. In fact it is hard to get in and out at all in a small period of time. It usually takes a big investor something like 8 to 12 weeks to exit a position without setting off the panic in the market. This fact is what creates so much emotion in the market and is at the root of why good companies are sometimes on sale. Some relatively short-term problem creates a panic as these big fund managers exit and the price drops far below the value and this is good stuff for us.
The third investing lie is that you are led to believe that the best way to minimize risk is to vastly diversify your investments and just hold them for the long term. This vast diversification Warren Buffett calls over diversification. At the same time, it is not bad advice to vastly diversify for anybody who is completely passive about their investments. If you do not know what a business is worth then you must diversify to protect yourself. A lot of great investors do not usually diversify. Warren Buffett's portfolio of more than a hundred billion dollars is focused on about ten stocks.
As Buffett said, diversification is for the ignorant, the right way to invest is to really understand and become an expert in what you are investing in and stick to it.
One way Warren suggests you to look at investing as if you have a punch card and it only has room for 20 punches. That's a great way to think about buying companies as an investor. When you get to the twentieth punch you are done buying companies for the rest of your life. So if you knew that you would be very careful about what you bought.
Risk does not come from a lack of diversity in investing but rather it comes from not knowing the value of the businesses that you own. The idea of holding long term is a great idea but when things change the investment has to change too. Holding a bad company long term just because it is putting out a big dividend is a recipe for disaster for you. Invest only in what you understand and try to buy it when it is on sale.
