Thousands of books have been written on the subject of building wealth, and many thousands more specifically on the topic of investing. (I’ve even contributed to the stack myself!)
But I’ve got a secret to share with you: To succeed as an investor, you really don’t need to know a lot of complicated formulas or sophisticated terminology. What you do need, instead, are the right habits of mind. And one way to cultivate those habits is by focusing on a few simple concepts.
Here are six principles that, if you take them to heart, will put you on the road to riches, starting today. To illustrate them (and perhaps make the story a little more fun), I’ve quoted liberally from various wits and wiseguys who have taught me, through the years, the fundamentals of both investing and the “business of life.”
#1 – Keep Your Money Machine Fueled Up
Years ago, I saw an epigram by Ben Franklin that has stuck with me ever since. Indeed, it’s at the core of the success I’ve enjoyed as an investor. “Money makes money,” the old Philadelphian observed, “and the money money makes, makes more money.”
Most folks who hear this amusing sentence dwell on the second half, where Ben extols the wellknown virtues of compounding. Money invested at interest, or in a growing business, accumulates more money over time. But I’ve always been drawn more to the first half. You need money to make money. And you can only get that “seed money” by saving.
Whether you’re 19 or 99, you should adopt a lifestyle whereby your income exceeds your outgo. (Otherwise, as Rick Rule points out, “Your upkeep will be your downfall.”) By saving a portion of all you earn, you’ll have a constant supply of new money to fuel your compounding machine.
I recommend setting aside at least 10% of your gross income, and preferably more like 15% or 20%, to invest. If you do, I can testify from my own experience that your wealth will grow faster than you can possibly imagine.
#2 – Take Risks When You’re Young
Søren Kierkegaard, the 19th century Danish philosopher, said it best: “During the early periods of a person’s life, the greatest danger is not to take a risk.” He was probably thinking of career choices, but his insight applies to investing, too.
According to a recent study by Merrill Lynch, six in 10 affluent investors under the age of 35 describe themselves as “conservative,” a significantly higher proportion than among investors age 35 to 65. Younger investors have witnessed two devastating bear markets over the past 10 years. As a result, these folks nowadays tend to shy away from stocks more than their elders do.
While understandable, a too-cautious approach may work against today’s younger investors as the years march by. Over the long run, it’s a pretty safe bet that a portfolio of well-managed businesses will grow in value faster than Treasury notes at 2% or bank accounts at 1%. Thus, younger investors saving for long-term goals, such as retirement, should generally favor stocks or at least the more aggressive types of bonds (mortgages, emerging markets, high yield). There will be plenty of time, when you’re an old goat like me, to focus passionately on preserving what you’ve earned.
#3 – Be a Contrarian Bargain Hunter
One of my favorite quips under this heading comes from Oscar Wilde, England’s enfant terrible of the late Victorian era: “The basis of optimism is sheer terror.” It’s when most people are afraid that you get a chance to buy bargains. Certainly, we’ve seen the terror factor busy at work in the past few weeks!
Of course, the contrarian bargain hunter also needs to know when to sell. So, in addition to Wilde, I encourage you to heed the words of Al Goldman, longtime market strategist at A.G. Edwards: “Buy at the wake, sell at the wedding.”
Next time Wall Street is in a party mood, as it surely will be again one of these days, grab your iPhone, sneak into a corner — and place a flurry of sell orders. Chances are, the revelers won’t even notice what you’re up to.
#4 – Don’t Compromise on Quality
Here again, the irrepressible Oscar Wilde is our guide: “I have the simplest tastes,” he said. “I am always satisfied with the best.” When I look back on the mistakes I’ve made as an investor, they nearly always resulted from entrusting my money to a business that wasn’t as strong as I had thought.
As a public investor (i.e, not a management insider), it’s impossible for you or me to know all the details of a company’s inner workings. However, certain things will normally tip you off to a high-quality investment: low debt and lots of cash; a long history of rising dividend payments; a stable management team that levels with investors about the company’s challenges and shortcomings.
At a low enough price, businesses that lack these attributes can be good speculations. But don’t kid yourself. They’re not high-quality investments — the kind you can hold for years, even decades. As Gary LaPierre, veteran newsman for Boston’s WBZ radio, used to say: “You can’t shine a sneaker.”
#5 – Control That Urge to Panic
It doesn’t help to buy bargains if you turn around and dump them in the midst of a market meltdown. Truth is, most publicly listed investments will trade below your purchase price at some point — usually early on in your holding period, when your convictions are most easily ruffled.
For reassurance, listen to the advice of billionaire oilman J. Paul Getty, who really understood the principles of successful investing. In his 1965 book, How to Be Rich, Getty declared: “Owners of sound securities should never panic.”
What are “sound” securities? High-quality stocks and bonds (see previous item), acquired at a fair price. It makes no sense to ditch assets of this caliber just because other investors are fleeing in panic. Like a tennis ball, blue chip investments you bought at a sensible price will nearly always bounce back — often a lot sooner than you expect.
Meanwhile, learn to accept the market’s erratic swings with a shrug of your philosophical shoulders. As Jimmy Durante, one of my favorite old-time entertainers, was fond of saying, “If you want the rainbow, you’ve got to put up with the rain.”
#6 – Set Reasonable Expectations
Many people get discouraged because they expect their investments to perform in a dream world. “Oft expectation fails,” noted Shakespeare, “and most oft there where most it promises.” I recall how, at the end of the 1990s, polls showed that stock investors were looking for their index funds to deliver 20% (or more) every year over the next decade. Given the sky-high market valuations of the time, such hopes were totally unrealistic. Nature promptly dashed them.
So beware of extravagant promises. Don’t expect to double your money every 90 days. If you can make your portfolio grow 7%-10% a year over the long run, you’ll be very satisfied with the wealth you pile up (especially if you add periodic savings, as I suggested earlier).
Expect, too, that some of your investments won’t pan out. Diversification will save you from the big hit, but when you make a mistake, don’t wallow in regret — move on. As St. Ignatius of Antioch counseled, “It is the mark of a great athlete to be bruised, yet still conquer.”
So there you have it. All you need to know about investing (or almost all) in six simple phrases. Now it’s your turn to pick up the ball and run with these time-tested principles. As I’ve heard said, “Today is a gift. That’s why it’s called the present. Don’t waste it!”