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There are many things I wish I knew when I started investing. And in this video, I'll go over six lessons I've learned from some of the most successful investors in the world. Figures like Warren Buffett, Charlie Munger, Ray Dalio, and Jim O'Shaughnessy are incredibly interesting, but they also have a deep understanding of how to get the best returns from the markets.
Using their quotes as a basis, I consider how the data supports their views and why it is worth listening to their words. So, if you want to stay up to date with developments in world markets and the global economy , why not subscribe to our free weekly market overview? The link to it will be in the description under the video and above my image.
Now let's take a closer look at some of the best tips. This is not a financial recommendation. If you need advice tailored to your circumstances, please contact an independent financial advisor. If you are going to invest, you should avoid over-trading, i.e. not trading too often. Warren Buffett has a great analogy for this.
He says that calling those who trade actively (i.e. too often) investors is like calling someone who constantly goes on one- night stands a romantic. Apparently, in his opinion, if you are an investor, you simply shouldn't trade so often. Developing his analogy, he believes that few people can achieve long-term investment success if they " fly from flower to flower," in other words, constantly change investments.
Dalbar conducts an annual analysis of investor behavior . They show that over the 20-year period from 1996 to 2016, the S&P index had an average annual return of about 8.2 %. Yet the average investor return during that period was significantly lower—4.7%. The reason is that the average holding period of equity funds was very short— only about 3-4 years.
During periods when markets were declining, investors' holding periods became even shorter. So, to succeed, these investors could simply hold their assets longer and get more of that 8% return. So the main conclusion is not to react to short-term market conditions. Don't sell when markets are falling and don't buy when everyone else is buying, as this leads to bad decisions.
Jim O'Shaughnessy, who wrote the excellent book What Works on Wall Street and hosts the podcast Infinite Loops, once said that the best thing about investing is often doing nothing. And yes, it's boring. This is incredibly boring. You won't be telling interesting stories about your market savvy at parties.
But he advises simply remaining impartial to all the emotional events that occur. And if you do that, you will be ahead of almost everyone else in the long run. Another bad habit to avoid is the pursuit of profit. In other words, you should try not to follow the crowd. In fact, Warren Buffett describes fear and greed as extremely contagious diseases.
He never tries to predict the appearance of these diseases, but when they come, he simply tries to be afraid when others are greedy, that is, he sells when the markets are too high. And he tries to be greedy when others are afraid. In other words, buy when other people are selling. One way to determine whether people are greedy or scared is to look at ratings.
Here are the S&P 500 estimates over the past 20 years. This is the 12-month forward P/E ratio , which divides the index price today by the 12-month forward earnings forecast, based on broker forecasts. Or you could say it another way: how many dollars people are willing to spend for each dollar of projected profit.
When markets were overvalued, like during the dot-com boom , people were willing to pay about $23 for every dollar of profit. And during the global financial crisis, people were willing to pay only $8 for every dollar of profit. So you see that the markets are expensive right now as people are paying much more than usual for every dollar of projected profit.
Whereas at the height of the global financial crisis, stocks were cheap. Maybe that's why Warren Buffett still holds onto his cash. He has n't made any big purchases lately because it's very hard to find bargains in this market, despite all the terrible economic news . Another way to look at this is to analyze the price trend of the S&P 500 over a very long period of time.
Here we are looking at a period of over a century. Notice how the trend is quite stable, but there are huge fluctuations above and below this trend. This applies to both the price of the S&P 500, which is the top line, and the profits made by the S&P 500. And again, right now you see that we are well above this long-term trend.
So, to paraphrase Warren Buffett, investors are really greedy right now , which is probably why he's so cautious. As an investor, you should always try to take a long-term perspective. Or, as Warren Buffett says, some things just take time. Regardless of talent or effort, it is impossible to make a child in one month by impregnating nine women.
Perhaps the best story illustrating Warren Buffett's patience is the story of his purchase of Coca-Cola shares. Here is the Buffett family grocery store as it was in the 1930s. As a child, he first tried Coca-Cola in 1935 or 1936, when he realized he could buy six bottles of cola for 25 cents at the grocery store, or a little more than 4 cents apiece , and then sell them to his neighbors for 5 cents.
This helped him realize Coca-Cola's extraordinary appeal to consumers and its commercial potential. And then, in 1988, he purchased 14 million shares of that company. You can see that as a percentage of all the shares he owned at the time, this was a very significant amount. When he talks about his investment horizon, he says he planned to hold these securities for the long term, adding that his preferred holding term is forever.
He described Berkshire Hathaway as the opposite of those who rush to sell and take profits when companies are doing well, but continue to hold on to businesses that are disappointing. He continued to increase his stake in Coca-Cola until he had accumulated 100 million shares by 1996. There were two Coca-Cola stock splits, bringing his total holdings to 400 million shares.
In total, he paid about $1.3 billion for the shares, which are currently worth about $22 billion . And this is an annual growth of about 10% per year. And this particular block of shares demonstrates the reward for Warren Buffett's patience. It's quite surprising , considering that Warren Buffett is arguably the world's best stock-picking expert, that he has a rather negative attitude towards active management, that is, the ability to pick stocks that outperform the overall market.
And one of the things he dislikes the most is high commissions. He says that it is usually the managers who make excessive profits, not their clients. That's why yacht owners are usually Wall Street employees, not their clients. So, he believes that both large and small investors are better off sticking with low-cost index funds.
He gives a very simple example to understand why low commissions matter. If passive investors get average results before expenses because by definition they simply buy the entire market, then active investors who make up the rest of the market should also get the same results before expenses on average.
He further notes that the group with the lowest costs wins. This does not mean at all that there are no active managers capable of outperforming the market. It's just about the group as a whole. But the consequence of this is that the vast majority of managers who try to beat the market fail after paying commissions.
If we look at the S&P Index and Active Management report, which is updated every 6 months (and that's just for Europe), over a long period, such as 10 years, most funds underperform their benchmarks. In fact, the best indicators here are in European stocks, where more than 3/4 of funds lose to their benchmarks, and for European managers investing in the US stock market, only 3% of funds outperformed their benchmark.
This demonstrates the catastrophic failure of the entire active fund industry, and also explains why many people are taking Warren Buffett's advice and switching to passive funds. But even if there are managers who can outperform the benchmark , how do we find them? Buffett notes that this search is complicated by the fact that some professional investors, like amateurs, simply get lucky over short periods of time.
He says that if a thousand managers make a market forecast at the beginning of the year, it is very likely that at least one of them will be right for nine consecutive years. And here he is—this lucky guy. And then, rather abruptly, he says that a thousand monkeys could just as likely make a seemingly wise profit, but with one difference.
A lucky monkey wouldn't see a line of people wanting to invest in it. This reminds me of Robin Wigglesworth's post about a Norwegian TV program where professional stock analysts competed against an astrologer, beauty bloggers, and cows grazing in a field. You can see that the cows were choosing their stocks by leaving marks on this grid.
Who do you think performed best during this three-month period? The astrologer took last place and , in fact, performed worse than the entire Norwegian stock market. Professional investors were walking alongside the cows, and the star bullish manager was named Gul Ross. But the beauty bloggers did the best, despite the fact that they hadn't even heard of one of Norway's oldest and largest companies—Norse Hydro.
It is very important to control the risks of your portfolio right now, and one way to do this is to diversify your investments. Ray Dalio described this as the "holy grail": making a profit with minimal risk. He has a great chart that plots the portfolio risk along the Y axis, with high risk at the top and low risk at the bottom, depending on the number of assets in the portfolio along the bottom axis.
The key point here is that as you add more assets, moving from left to right, the risk gradually drops until it reaches a plateau. Please note: the higher the correlation of assets, the higher this lowest level of risk. Whereas if you combine assets with low correlation, the overall level of risk that can be achieved is much lower.
And most importantly, there is a possibility of losing money during the year. If you don't diversify at all , it's about 40%. But it is much lower if you still diversify your portfolio. The key point here is that when you choose multiple assets, or as Dalio calls them, income streams, you never know which one will turn out to be better.
However, diversifying in this way reduces your risk while you wait for at least one or more of them to generate income. So , the goal of diversification is to increase the number of units of profit you receive for each unit of risk you take on to generate that profit. Or, in financier language, you maximize your return, taking into account risk.
That's why when you see me talking about my own portfolio, I analyze Vanguard funds in this way. This tree shows how much each of these funds correlates with each other. And since there are so many funds, it would be impossible to understand the correlation matrix because there are too many numbers.
So this is a convenient and simple low-dimensional way to see these relationships. If two funds are located close to each other on the tree, they have a high correlation. And if two funds are far apart on different branches, they have a low correlation and better diversify each other. You can see that the tree is quite clearly divided into bonds at the top and stocks at the bottom.
And for some reason I see it as the Scooby-Doo characters: Velma is rather boring and studious, representing bonds, and Scooby-Doo is crazy and exciting, representing stocks. So, to have a balanced portfolio, you have to have a little bit of Velma and a little bit of Scooby-Doo. But you don't want too much Scooby-Doo or too much Velma if you're aiming for that balance.
So, in practice, I prune the tree at a certain point . Here I divided it into three branches, and then I simply choose the best funds from each of them. But no matter how you do it, to maximize diversification, you should choose uncorrelated funds. In general, you should be careful with predictions: don't ignore them, but simply accept them with a certain amount of skepticism.
Charlie Munger, Warren Buffett's longtime partner, puts it very aptly when he says that he doesn't use formal forecasts. I do n't let people make them for me because I don't want to get bored at my desk. But he constantly sees them being put together in a very absurd way. And he says that many people believe in them, no matter how ridiculous they are.
Jim O'Shaughnessy reinforces this view and begins with a quote from Warren Buffett that forecasts create the illusion of apparent accuracy. The more thorough they are, the more you should worry. Jim notes that people tend to take recent events and predict similar returns for the future, which is a mistake.
He cites David Dremen's book, " Adversary Investment Strategies: The Psychological Advantage," where he examined 30 years of analysts' and economists' earnings growth estimates and analyzed the average annual percentage error of those estimates. Analysts had a whopping 81%. And economists have a 53% error rate.
Dreman also reviewed surveys conducted at major international conferences of institutional investors. These are pension and hedge fund managers between 1968 and 1999, and it regularly issued a questionable list of stocks. The most popular stock of 1999 was Enron, which later became the largest bankruptcy in American corporate history.
In fact, it seems as if some of these professional forecasters are using this " advanced technology" for their predictions. That's all. Some of the best investment advice out there, and I've tried to pick out the top six topics. So if you enjoyed this video, want to learn more about investing, and support us, why not head over to patreon.com (link above my head) and join us?
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