10 Investing Tips & Methods You Can Use

The more I dabble in investing, the more I realize that it’s something of an “opposite world” compared to the principles I use in day to day life. Things that make intuitive sense in the real world are actually failures when it comes to investing. Here are ten great investing tips of that phenomenon.

Be the best – settling for average is a loser’s game.
In real life, it’s always helpful to strive to be the absolute best person you can be. Putting in the sincere, concerted effort it takes to be the very best at what you do is a strong path towards success, as the lion’s share of the credit and respect go to the people who are the best. The basic principles for being the best are consistent over time: work very hard, respect and care for others, step up when leadership is called for, and handle difficult situations well. No matter what situation you’re in, those tenets will guide you towards being the best.

In investing, constantly striving for the absolute best returns will often lead you down a dangerous path. In order to achieve those kinds of “best” results, you have to take on a huge amount of risk by reducing your portfolio diversity and buying heavily into a small number of investments. Doing that puts you at a big risk – if one company runs into trouble and you’re heavily into their stock, your gains go away very quickly. The actual truth is that you’re far better off as an investor trying to get the average return at the lowest cost possible over the long haul, and that usually means being very diverse and very steady with your investments, not seeking the big win.

Self-confidence can get you far.
In real life, the appearance of success often implies the presence of success to others. Dress in an expensive suit, drive an expensive car, and act with confidence, and people will believe that you’re successful at what you do and place some confidence in you, whether founded or not.

In investing, self-confidence often leads straight to failure. Self-confidence causes you to believe you’re an expert investor and that everything you touch turns to gold. No one has the Midas touch – not even Warren Buffett or Peter Lynch. You will suffer failures as an investor, and if you’ve been too self-confident about your investment choices (resulting in behaviors like putting all your eggs in one sure thing basket), you’ll get burnt badly.

Let your heart lead, not your mind.
In real life, your internal moral code, conscience, and instinct are great guides in leading you through the labyrinth of human interactions. Gut instincts are often the result of watching many, many patterns over time, and because basic human behavior is often at least somewhat predictable, our gut instinct often leads us down the correct response path. Whenever my gut and my mind are fighting over what to do when in the real world, I usually let my gut win.

In investing, gut instincts have the opposite effect. Your gut instinct tells you to make conclusions based on recent behaviors and behaviors you’ve witnessed in the past. Thus, a short-term uptick signals a gut instinct to invest for most people. The only problem is that short term investments in most markets are extremely chaotic. They go up and down for reasons far beyond our quick perceptions, and thus just relying on our natural instincts has very little value at all. In fact, often it has a negative value, because we may interpret a natural fluctuation as being something more than the little trend it is, so we buy on the peak or sell short at the bottom and end up eating our shorts.

When in Rome, do as the Romans do.
In real life, this is an excellent principle to live by. Adopting some of the social norms around you helps you blend in much more quickly and begin establishing relationships instead of appearing as an outsider to the rest of the group. Fitting in can often be the key to defusing a social situation and making it work. Not only that, imitation is a great way to learn a new skill.

In investing, listening to CNBC all day and using their “advice” will get you nowhere. “Fitting in” with a group of people who are recommending stocks either because they’re invested themselves or based on minimal research is not a safe way to invest. Neither is reading the papers and seeing what the “hot” new investment of the minute is. If you’re reading about fantastic results and are thinking it’s time to “do as the Romans do,” it’s already too late to get the big returns – and you’ll often wind up being the one who ends up holding the bag. The same is true when there’s a selloff – the time when everyone is selling is the time for you to buy, not to sell. Do your own homework and pay no attention to the delusions and madness of the crowds.

Listen to the advice of people wiser than yourself.
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).

A very specific focus will reap great rewards.
In real life, becoming a top person in a specific field can reap huge rewards. Take musicians, for example – one does not become an expert musician overnight. It takes focus, intensity, and dedication to master a musical instrument.

In investing, a focused intensity will keep you from properly diversifying and can leave you very open to sudden downturns. While it’s good to know what you’re investing in, if you focus in on one sector so intently that you lose sight of everything else, you’ll get burnt badly. Just ask the people who got downed by the tech stocks in 2001, or the Enron true believers in 2000-2001.

You usually get what you pay for.
In real life, this is often a solid rule of thumb for purchasing. For the most part, less expensive products are made with inferior parts and tend to wear out quicker. Being an intelligent shopper means knowing how to balance what you get with what you pay.

In investing, the cost of the type of investment advice that might help you squeeze out another percent or two is often more expensive than the financial gains you earn from the advice – not to mention the time reading it, absorbing it, and acting on it. You’re far better off figuring out a simple investing strategy on your own, one with low costs, and simply executing it yourself.

The best way to guess what will happen is to look at the past.
In real life, our previous experiences are what we use to make decisions in life. We remember early experiences and quickly translate those experiences into an educated (and often correct) choice today.

In investing, past performance is no indication of future results. A mutual fund that does great one year might be atrocious the next. A stock that’s been in the basement for years might suddenly catch fire. From 1997 to 2000, Enron’s stock quadrupled, and then 2001 happened. You can’t guess what will happen tomorrow.

Short term milestones work well to make sure you’re progressing towards your goal.
In real life, using short term milestones to move towards a big goal can be a powerful way to get you moving towards something really big. You can mark your progress slowly over time as you add more and more effort to the pot.

In investing, short term investment results are extremely volatile and are hard to use for any sort of indication of progress. Stock investments really only work over the long term – if you’re looking at the short term (and you’re not daytrading), there’s little real meaning there at all. You can’t use a month’s worth of growth or loss in your portfolio as a unit of progress towards your bigger goal. The only metric you can use in the short term is that you’re consistently investing more over time.

If everything’s crashing around you, now’s the time to stand up to the plate and take action.
In real life, the people that take action during a crisis are the ones that are seen as leaders, and they deservedly get much of the rewards for taking on that challenge.

In investing, people who spring into action during a fall in stock value are almost always making a bad move. The only time one should change an investment is when the fundamental reason for owning the investment changes. Did the company itself change? Did the company’s market situation change? Those are the questions to ask, and they have nothing to do with a short term crisis in the value of a stock, which could be caused by any number of reasons. Successful investors don’t immediately act during a crisis – they evaluate the situation carefully and don’t make rash moves.

It’s for these reasons that I prefer automatic investing. I just figure out my plan (centered around very broad-based and low cost index funds), set up the automatic investment each week or month, and then just forget about it. I rebalance once in a while, but only in that I change my contributions around so that my investment will eventually turn back into my desired allocation. And that’s it. No listening to the “experts,” no rash picks in a crisis, no believing I’m some sort of super investor. Slow and steady and calm.

It might go against my personal instincts, but it works.

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  1. Michael says:

    This should have been titled, “The Methods That Fail You in Ordinary Life Will Fail You As an Investor.”

  2. Trent,
    You make some compelling arguments here and I would agree with them for the vast majority of the general public.
    However, I will say that having self confidence and striving for better returns than the market average is certainly possible.
    No, not every investment you make will turn out positive, but the key is to have a system in place to ensure that you are only risking a certain amount of your capital in each investment.
    Developing a risk management system is not hard to do and, if you stick with it, you can earn some excellent returns while minimizing your downside risk.
    There are a many investors out there that lose money on more than half of all of thier investments and still crush the average market returns consistently. the key is that when they lose, their risk management system limits thier loss, but when they win…they win big.
    Great post overall!
    -Tyler

  3. Jeff says:

    Couldn’t agree more. Great post!

  4. I think that this is a FANTASTIC post! One of my favorites.

  5. Great comparison. Although, I think in
    “Listen to the advice of people wiser than yourself.” one could argue that the people wiser than us are NOT the talking heads on tv, but the Bogles of the world.

  6. Vered says:

    This is SO true.

    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.

  7. Oliver says:

    Vered- What do you not trust about financial advisers? Is it their advise or the investments they make?

  8. Trent,

    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

  9. Jay says:

    Hey there! I’m a fan of the site, but I am going to call foul, here. Two words: Warren Buffett.

    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.

  10. Mark says:

    Trent,

    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.

  11. Great post! Very true.

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

    Jennifer

  12. John says:

    Very interesting post Trent. I would like to see more dichotomies in Personal Finance from you (if there are any).

  13. Lo. Price says:

    I totally agree and this is one reason (or reasons) why I think most people would be better off getting professional help on their investments.
    Something I heard recently on a podcast kind of fits in with your last point. This guy said that our brains are wired to look for trends, which apparently helped us in our early days of humanhood, but which doesn’t work with investing. However, when a stock (or sector or index) starts going up, people assume it will keep going up and when it starts going down, people assume it will keep going down.

  14. Martijn says:

    Good stuff, but there’s three ways of investing, not two:
    1. The Search for Alpha – this is the holy grail and what hedge funds seek to find. Alpha represents growth irrespective of market volatility. To be the “best” means to find alpha, which for mere mortals like us is next to impossible, and very hard for the immortals amongst us (eg. LTCM.)
    2. Accept you can’t beat the market and diversify risk – this is the best advice for individuals out there and seems to be what you’re advocating.
    3. Think you know better and loose.

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

  15. Trent,
    I’m curious as to how you came up with these. What are your investment results? Have you beaten the market consistently?

    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

  16. hi, i'm random. says:

    random question: what do you think about multi-level marketing businesses such as WFG? do you think its a good career to get into?

  17. Joe Maher says:

    A really great breakdown of how our psychology gets wrapped up in poor investment decisions. I love the way some of your ideas are organized. I have recently decided upon index funds after a year of trying to learn how to be the next Buffet. This post really sums up the reasons why investing can be so misleading to otherwise successful people.

    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.

  18. Trent Hamm Trent says:

    Most of the counterarguments (particularly holding Buffett up as an example) are missing the point: I’m not writing for hardcore investment professionals. Buffett agrees with this perspective, actually. At the most recent Berkshire stockholder meeting, when a shareholder asked for the single best specific investment idea Buffett could recommend to an individual in his 30s, Buffett said: “I would just have it all in a very low-cost index fund from a reputable firm, maybe Vanguard. Unless I bought during a strong bull market, I would feel confident that I would outperform… and I could just go back and get on with my work.”

    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.

  19. Bill says:

    No one commenting here has access to research even the lowliest mutual fund manager has at their disposal, much less the resources a Warren Buffet commands.

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

  20. Jay says:

    I can’t speak for anyone else here who isn’t in agreement, Trent. As for me – Buffett is a pretty famous counterpoint, but hardly a sole example.

    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.

  21. Will Perforce says:

    Trent,

    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.

  22. Will Perforce says:

    Ooops. Append “this article” to the penultimate paragraph.

  23. K says:

    I agree with your overall message here, but some of your points could be taken another way:

    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.

  24. Christopher says:

    I don’t think I disagree with your underlying premise, but I do disagree with the way you stated listening to expert advice. It’s a great idea to listen to Buffet or Bogle. If I had a friend who was a whiz kid analyst and had made great gains for his portfolio I would at least pay attention (though maybe not follow his recommendations).

    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.

  25. Green Grant says:

    Good lessons here. I’m surprised you didn’t mention index funds more, specifically under “settling for average” and “get what you pay for.” As you almost said (and Warren Buffet has stated), buying an investment with the lowest expenses and getting average returns should be the goal of most investors. The way you do this is with an index fund.

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