Finances do seem to be unique, though, in that if pick a random home improvement or cooking show you seem to see reasonably accomplished craftsmen with good advice on how to improve your work while in investments you almost reliably get bad advice from TV.

Listen to the advice of people wiser than yourself: Many people just getting started with investing have no idea where to start, so listening to the advice of a planner or friend with more experience can be very helpful, but only if it’s solid advice, not a hot tip.

The best way to guess what will happen is to look at the past: While it is true that past performance is no indication of future results, the primary reason for investing in index funds is the fact that even though they may fluctuate, overall they tend to rise over long periods of time. Therefore, looking at the past performance is the reason for confidence in overall future success.

If everything’s crashing around you, now’s the time to stand up to the plate and take action.
When everything is crashing, now is the time to start investing if you haven’t been, since everything is undervalued.

Your best article I’ve read. Perhaps one of the most comprehensive, nail-it-to-the-door articles on personal investing psychology in the personal finance blogosphere. Note to self: READ THIS BEFORE ANY TRADE!

I believe most of the negative commenters, as you say in your recent reply, missed your point. Yes, sure, maybe there are some passages you could have ruined stylistically and overloaded them with caveats and clarifications, but anyone really thinking about investment strategies for the average person should love (if they’re there with you) or pay attention to (if they’re still finding their own investing voice).

Anyone else should post their investment record or shut up.

I’m not saying one needs to be Buffett, or that one even needs to be professional. I know several people who have turned professional AFTER being successful at it as an “amateur” for a while.

But you’d not give a 15-year old who’d never had any Driver’s Education your car keys and have him head on out on the freeway in a major city and expect his “life experiences” to see him safely there and back again. But that doesn’t mean that driving is something that should be restricted to the professionals because it is so far outside of the experience and skill set of the common man.

It is my feeling and experience (much of it borrowed from others, admittedly) that investing is much like any other pursuit in life, but it is not one that should be done in ignorance. Those common life experiences and methods ARE applicable, but aren’t enough to equip you in that or any other endeavor requiring a solid technical foundation.

That’s exactly why Buffet recommends focusing on one’s career path, instead of playing “beat the market”

Sure, if you’re devoting most of your life to being a professional investor, you’re going to want to think differently, but if you’re a professional investor and reading this site for investment advice, you’re wasting your time. If you’re reading this site and trying to tell yourself you’re as good as a professional investor, you’re falling prey to overconfidence.

The one thing that I think does correspond to real life, however, is that true progress takes TIME. You will not be a CEO straight out of college, instead on should invest time to build skill sets gradually over time. The same is true for money. So many people see investing as a “get rich quick” scheme. But like all good things in life, money requires time to grow into something really significant.

Also, the part about listening to the wise, consider this fact. Every nobel prize winner in economics has vouched for low-cost index funds. Last weeks “big time trader” on a news program will have advice as hollow as his background.

I’m asking out of personal curiosity. I’m not much of an investor myself, just mutual funds but some friends of mine really get into it. After reading Graham’s Intelligent Investor, I can’t say I disagree with some of these, but I’m wondering if this is personal experience or “book learning.”
Thanks

Seems like you’re only comparing 2 & 3 – valid for individuals, but not the only game out there.

I think this is part of what confuses people about investing, so I think this was a particularly good way to express it.

Jennifer

Your advice is okay for investors who don’t want to devote significant time to learning how to invest and to analyzing investments. However, there are several significant errors for people who don’t fall in this group.

1) Portfolio concentration is not necessarily more risky. In fact, not only can you get higher returns, it can be less risky if you know what you are doing. I have a very focused portfolio, and I rarely take losses. My philosophy is based on Warren Buffett’s philosophy. I don’t recommend it to people who don’t want to study it seriously.

2) Self-confidence is vital. It is overconfidence that you want to avoid.

3) Focused intensity is important if you want to be a great investor. The greatest investors all have it.

4) Your statement that past performance is no indication of future results depends on what you are referring to. The past underlying business results are, in my opinion, the best indicator of future underlying business results. However, you have to understand what drives the business results and what could cause it to change, and you need to avoid investing in businesses that you can’t figure out what the future is going to look like.

5) The best time to invest for serious investors is when everything’s crashing around you. As Warren Buffett says, “Be fearful when others are greedy, and be greedy when others are fearful.” Personally, I get pretty excited when I see stocks dropping like crazy.

In any case, for the vast majority of people, I suggest automatic investing into index funds just like you suggest.

But a few more words:

Be the best
In investing, you DO want the best. But your definition of “the best” needs work. The lottery might give you the highest (potential) return at millions-to-one, but its risk is so high it’s hardly the “best” investment. But the top investors are pretty picky. They choose “the best.” The best vehicle at the best time. And what defines “the best” depends upon their needs.

Self-confidence can get you far
You are confusing self-confidence for ego, pride, and the bravado of ignorance. The investors who I know who do well have self-confidence born of EXPERIENCE.

Let your heart lead, not your mind.
True, an emotional investor in short-term markets will get themselves clobbered. But – invoking Warren Buffett again – his biggest and most permanent investments came about because – according to him – he liked the management and wanted to work with them. You need both your heart and mind working together in “real life” and in investing.

When in Rome, do as the Romans do
Ummm… those talking heads on TV are not the Romans. But you are correct – if most of the people are losing money, you do NOT want to be with the herd.

Listen to the advice of people wiser than yourself
To succeed in anything in life – including investing – you want to seek out people who really SUCCEED, and then learn from them. Don’t listen to their sound bites. But study what they do, how they do it. Oh, and make sure they really are successful before you try and emulate them.

A very specific focus will reap great rewards
Even the “top” musician doesn’t focus exclusively on mastering a single song. They usually don’t limit themselves to a single style, though there may be one that is their forte. You need some breadth in real life, too.

You usually get what you pay for
Well, yeah. The point of investing is to get more than what you pay for – at least in the long run.

The best way to guess what will happen is to look at the past
I think that’s a straw-man example.

Again – take Warren Buffett as a clear counterpoint. He chooses companies based on their past performance. But he looks at the long-term, not the short term. A company which is getting a consistent return on Equity and cash growth of 20%, and has had solid, honest management with a great track record, and has been in business 15 years or so will PROBABLY keep doing the same thing for the next 15 years.

Sure, some guesses will be wrong. That’s why you have an exit plan. Disasters happen. “Black Swan” events happen. The stock market fluctuates a lot in the short term. But eventually, the noise settles down.

I know many investors who are making consistent gains, year after year, and it is not because of a “lucky streak.” It’s because they can consistently predict value – and while NOBODY is correct 100% of the time, they know how to keep their losses smaller than their wins.

As a friend (a professional investor for the last few years) once told me, “Oh, I lost a LOT of money over the last six months. But I also MADE a lot more than I lost.”

Short term milestones work well to make sure you’re progressing towards your goal
You have to use the correct milestones. Measuring the success of a company by its current stock price is like judging the quality of a book by the color of its spine. Use the *real* indicators of success of a company as its milestones, and its stock price will – sooner or later – follow.

If everything’s crashing around you, now’s the time to stand up to the plate and take action.
The most successful investors aren’t the ones following the herd – they are the ones ahead of the pack, who ARE taking action while everyone else is waffling and waiting.

The truth is – from my (admittedly limited) perspective at least – those same skills will do you very well in investing. But they are no replacement for having a good understanding (and experience) in the investment vehicle of your choice. Otherwise, it’s like an experienced bicyclist jumping into the pilot seat of an airplane, and blaming his failure on it being “the opposite of riding a bike.” Those who do both might tell you otherwise.

You said, “In real life, it’s a great idea to heed the recommendations of experts in a field. I have a friend who is a tremendously good golfer, so when he recommends golf balls or a golf club or a training item, I’ll listen. Another friend is a tremendously good woodworker – if he recommends a router, I’ll listen. If a friend makes a suggestion about my own life when I ask for advice, I’ll listen.

“In investing, listening to most recommendations will usually just lead you astray. The talking heads on television, often described as stock pickers or experts, have notoriously bad track records and often are just recommending whatever stock they have a lot of at the moment. That’s not expert advice. If you want true expert advice on how to invest your money, seek a fee-only financial planner, not someone on CNBC telling you to put all of your cash in Lugubrious Whing Whang (LWW).”

Your analogy doesn’t really fit here, because what you’re saying is that “in real life listen to the experts instead of the fakes” and “in investing listen to the real experts (fee-only financial planners) and not the fakes (CNBC talking heads, the “Jim Kramer’s” of the world.”

My point is that in both life and investing it pays to listen to real experts (and not fakes), so this example does not fit with your premise, “The Methods You Use to Deal with Ordinary Life Will Fail You As an Investor.”

This example would fit better in a category called, “Life and investing…. both require similar skills and habits.”

Anyway, this was a thought-provoking piece as always! Keep up the good work.

PF Wilson, Managing Editor, http://TheInvestorReport.com

I agree that automatic investing is great, but I don’t use it. I do my own research and pick, in addition to index funds, actively managed funds – thought they are always no-load, and low-cost. I don’t trust financial advisers, I don’t fall for trends and I am a buy-and-hold type investor.

This post is absolutely brilliant.