Golden Life Lessons From Investing

What are some life lessons that we can learn from investing?

TIME IS MONEY, BUT MONEY IS ALSO TIME

They say time is money. The equation goes the other way to: Money = Time. Now, other things equal, the point of money is to have financial freedom, more financial freedom derived is really just more time.

Time is on the side of a continuously improving company. Time is also on the side of a person who’s consistently improving. Make every moment count.

DON’T PREDICT YOUR FUTURE, MAKE IT

 

A great company can’t predict the future, but it can make it. You might not be able to know what happens in a few years, but you can control what you do today, keep your long term goals in the crosshair and day by day, struggle by struggle, you’ll get there, sooner or later.

SEEK VALUE: DON’T BE TOO QUICK TO JUDGE OTHERS

Behind every stock is a company. Most people just look at the ticker price and judge whether or not it will go up or down. Instead, read the balance sheet, look for intrinsic value, margin of safety,learn about the company. Don’t be too quick to judge a stock based on just it’s price; don’t be too quick to judge people upon first sight.

Sometimes great companies will experience turmoil, unforeseen events can shake up even the greatest companies. Just like some individuals can be shaken by events, sometimes it just takes time to see the value in someone.

 In the early 1990s, aerospace company General Dynamics was in bad condition. To be precise, $600 million in debt, negative cash flow and on the verge of bankruptcy. To the surprise of many investors, it made the impossible turnaround and long story short, is one of the leading aerospace companies today.

Sometimes people are in these rough times in life, perhaps they went on a bad breakup, lost their job or are just having a bad week at work, they may seem mad or irritated at first glance, but there can always be more to the story. We’ve all experienced bad times and made mistakes and through those mistakes we learned something or two.

SURROUND YOURSELF WITH WINNERS

 

Ideally, in our investment portfolio, we want to hold winning positions (great companies); ride your winners and let go of your losers. In life, surround yourself with people whom you value and admire, they will better your self-development. Toxic individuals may weigh you down and slow personal growth; thats the last thing we want.   

SORRY ISN’T ENOUGH

 

The greatest investors have made billion dollar investment mistakes; but they adjusted and learned from it. Sometimes you’re greatest stock picks will turn out to be a mistake. Don’t just be sorry. Learn from it. In life, when you make a mistake, be quick to admit it, learn from it and work on ways to improve from it. The importance here is the actions taken to correct the mistake and to prevent it from happening again.

“There’s no shame in losing money on a stock. Everyone does it. What is shameful is to hold onto a stock, or even worse, to buy more when the fundamentals are deteriorating”.

– Peter Lynch 

 EMOTIONS ARE JUST AS IMPORTANT AS INTELLIGENCE

 

Regarding long-term investing, Peter Lynch says: “Everyone has brainpower. But not everyone has the stomach for it”. The stock market is a wild animal, and Mr. Market is often moody, euphoric and irrational. Some days he’s very optimistic, others, he’s incredibly pessimistic. Intelligence may help you detect a great stock, but emotional intelligence and disciplined temperament will give you the gut to ride the rollercoaster that is the stock market.

Intelligence will no doubt allow you to strive in learning, applying and information processing, but emotional discipline will allow you to keep your head in when everyone else is losing theirs. It can help you control your anger and save you from irrational actions. Pair these two together, you have a winning combination, in investing and in life.

Quick summary:

All in all, time is the greatest asset of a great person, a great company, but for a human life, time is limited. Making money will allow you to have financial freedom, but the goal of financial freedom is ultimately to have more time. Time to spend with your loved ones, your friends, to travel and explore the essential part of life that isn’t investing. Of course, do continue to pursue your financial goals and knowledge, but don’t forget the endgame.

As always, JMO (just my opinion). Cheers.

Why You Need To Start Investing Young

The answer lies in the most useful, but most scarce (limited) resource ever: TIME (and yes, time does indeed equal money). You will take advantage of compound interest paired with time; along with the right investments, you can have a capital powerhouse.

The magic of compound interest

 Compound interest does wonders for young investors in the long run (it’s not magic, it’s just basic math). Here are a few monetary examples that will get you to start investing at a young age.

-If you had invested $1000 in Berkshire Hathaway (BRK-A, Buffett’s company) in 1964, and patiently waited 50 years until 2014, you would have $18,261,630 (a whoopin’ 1,826,130% gain).

 Let’s visit a few examples, with fixed variables just to show you what compound interest can do:

Let’s say you invest $8000 today, into a fund that will average out 8% a year, compounded for 33 years:

Year 1:     $8,640

Year 5:     $11,754.62                             Year 30:   $80,501.26

Year 10:   $17,271.40                            Year 31:   $86,941.36

Year 20:   $37,287.66                           Year 32:   $93,896.66

Year 27:   $63,904.49                           Year 33:   $101,408.40

Year 28:   $69,016.85

Let’s say instead of starting to invest when you’re 22 years old, you start later at 25.

That’s a 3 years difference. By the time you hit that $80,501.26 mark, someone who started 3 years earlier would have $101,408.40. Imagine what you can do with an extra $20,907.

Let’s go with a more eye-opening example, a fund that yields good results: 

 Let’s say you invest $12,000 today, and another $100 monthly into an amazing stock or fund that will yield 15% a year compounded for 23 years.

Year 1:     $15,095.42         Year 19:   $285,052.50

Year 5:     $32,870.49        Year 20:   $329,105.79

Year 10:   $74,848.51         Year 21:   $379,767.08

Year 15:   $159,281.30       Year 22:   $438,027.56

Year 17:   $213,434.67       Year 23:   $505,027.11

Year 18:   $246,745.29

Like the previous example, instead of starting at 22, you start at 25. Within those 3 years, you’re lagging behind $175,921.32 compared to someone who started at 25. You’ll have $329,105.79 (still very good) while you could have $505,027.11 (half a million dollars-even better), if you had just started 3 years earlier.

Think about it… that difference is enough for a considerable downpayment on a condo/ house in Toronto, Canada or can be used as retirement income.

Of course, this example fixes a lot of variables and requires a good return of 15% compounded over 23 years (rare, but yes, this type of performance does indeed exist): it shows the importance of time and starting early in investments.

 

“A low-cost index fund is the most sensible equity investment for the great majority of investors…by periodically investing in an index fund, the know-nothing investor can actually out-perform most investment professionals”.

-Warren Buffett

Now let’s say you decide to buy an index fund, as suggested by Buffett. Let’s keep it simple and select the Dow Jones Average. In 1915, it was $1,304 (inflation adjusted) and is currently sitting at around $17,360 as I’m writing this in late spring 2016. In 101 years, it went up around a total of 1,352%. That’s a multiple of about 13 times your investment. Compound interest paired with time does wonders.

If you’re worried about the market crashes and depressions, note this:

The Dow Jones Average survived the Great Depressions and countless others, 2 World Wars, more wars that followed, oil glut, the dot-com bust, the subprime mortgage crisis, etc. and will continue to survive and strive for times to come.

Mistakes

Mistakes are inevitable, they are part of the learning curve but you want to learn from it early, not late. Starting early will leave you room for mistakes. It allows you to adjust your strategies and gives you extra time to learn.

“If you love life, don’t waste your time, for time is what life is made of.”

-Bruce Lee

In summary, the examples provided have many fixed variables. The goal was to illustrate the difference even a few years can make in compound interest output. I am not implying that investing in stocks, bonds, index funds, mutual funds, etc. is the only way to take advantage of time. You may even choose to invest in your very own business.

Therefore, first investing in yourself could prove to be an invaluable investment, paired with time, your skills will grow exponentially which may provide you with valuable breakthrough ideas and investment knowledge.

All in all, start early, not late. Perhaps the earlier you start, the earlier you get to reaching your goals, and perhaps then, the more time you’ll have to enjoy your definition of a successful life. I would recommend the following books for those beginning in investing, the knowledge I have acquired from them are invaluable.

Of course, JMO (just my opinion).

For beginners, I would recommend the order as follows:

 1-The Neatest Little Guide to Stock Market Investing by Jason Kelly (I read this first too).

2-The Intelligent Investor by Benjamin Graham (Life changing book)

3-One Up on Wallstreet by Peter Lynch

4-Common Stocks and Uncommon Profits by Philip A. Fisher

5-Technical Analysis of The Financial Markets by John Murphy

6-Options made Easy by Guy Cohen (Just to explore derivatives)

This Book Will Change Your Life

When Warren Buffett was 19, he stumbled upon this book that forever changed his life. He even says that it’s “By far the best book on investing ever written”. Much of Buffett’s investing style has been influenced by his mentor and the author of this book; Benjamin Graham.

The Intelligent Investor was the second book I read, and YES, it was absolutely life changing. I read it again a few times again and will continue to re-read it in the future, as you should.

It doesn’t require excessive intelligence nor does it require much math, most calculations is elementary level (lucky for us, or at least, for me).

Not only has it provided me with great investment knowledge and shaped by investment style, it also strongly shaped my business perspective. This book opened my mind to the investment world and it allowed me to easily read every other investing book that followed.

Every student, let alone business students, should read this; the sooner the better. You can get the book here. Below I outline the main concepts from a few important chapters:

Chapter 1: Investing vs Speculating

There is an important line between investing and speculating. Benjamin Graham states it as follows:

“An investment operation is one which, upon through analysis promises safety of principal and an adequate return, operations not meeting these requirements are speculative”.

Proper investing requires necessary fundamental analysis, margin of safety and excellent temperament.

You hear speculation often: “I bought shares of XYZ because the price dropped, I feel like its going to go up tomorrow, I’ll sell it when it goes back up”: this is a gamble, not an investment.

Chapter 8: The concept of Mr. Market

The stock market is paralleled with a character that Graham calls Mr.Market. Imagine you own a share of a small business with your partner, Mr. Market. Everyday Mr. Market will tell you what he thinks your interest is worth and can offer to buy or sell you shares. Mr. Market has wild mood swings; sometimes he’s very optimistic and sometimes very pessimistic. Sometimes his valuation of your interest in plausible, and often other times, his valuations are illogical and silly.

Should you let Mr. Market’s daily evaluation of your share of the business influence and determine your view of the value of the share?

Only when you agree with him or want to trade. You may be happy to sell it to him when he quotes you a very high price for your share, and would be delighted to buy from him if he sells you his share for a cheap price. The rest of the time, you’re better off thinking for yourself and forming your own ideas of your value based on the business’ financial reports and operations.

Chapter 14: Defensive Investing

Graham notes 7 criteria for defensive stock selection:

1. Adequate Size and Enterprise: “All minimum figures must be arbitrary and especially in the matter of size required”. Avoid small companies, and companies with less than $100 million of annual sales for industrial companies, and not less than $50 million of assets for public utility.

2. A Sufficiently Strong Financial Condition: Current assets should at least double liabilities. Long term debt should not exceed net current assets.

3. Earnings Stability: Earnings are stable for past 10 years.

4. Dividend Record: Constant dividend payments for last 20 years.

5. Earnings Growth: Minimum increase of one-third of earnings per share during the last 10 years, calculate it by using 3 years averages at the beginning and end.

6. Moderate Price/ Earnings Ratio: P/E should be less than 15 for the past 3 years.

7. Moderate Ratio of Price to Assets (Price to Book Value): The price should not exceed more than 1.5x the most current report of book value.

 Chapter 20: Margin of Safety

“The risk is not in our stocks, but in ourselves”

This is one of the most important chapters (along with chapter 8) according to Warren Buffett. This chapter explores the risk factor. Determining a stock’s “true” value can be highly subjective, therefore intrinsic value isn’t a concrete value. By purchasing a “good company” at a significant discount, you leave yourself a margin for unforeseen errors (margin of safety). Think of it like this: “If I’m right, I can make a good sum of money, but what if I’m wrong”? You want to determine and minimize your exposure to risk.

If you’re building a sofa to support 6 people weighing 1000 lbs, you really want it to be able to support 1500 lbs; in case of a rainy day.

“If you understood a business perfectly and the future of the business, you would need very little in the way of a margin of safety. So, the more vulnerable the business is, assuming you still want to invest in it, the larger margin of safety you’d need”.

If you’re driving a truck across a bridge that says it holds 10,000 pounds and you’ve got a 9,800 pound vehicle, if the bridge is 6 inches above the crevice it covers, you may feel okay, but if it’s over the Grand Canyon, you may feel you want a little larger margin of safety

-Warren Buffett

I strongly recommend this book to anyone, it will help shape the way you think as an investor and a businessmen or businesswomen, as it did for The Oracle; Warren Buffett, myself, and all those whom have read it.

You can get a copy of The Intelligent Investor here.

“The fault, dear investors, is not in our stars- and not in our stocks, but in ourselves”

– Benjamin Graham, The Intelligent Investor

8 Life Lessons From Warren Buffett

Photo from Freebeacon
Warren Buffett, CEO of Berkshire Hathaway, billionaire, conglomerate king, philanthropist, and the greatest investor of all time. There are numerous lessons you can learn from “The Oracle”. Luckily, he believes that success and great investing doesn’t require too much intelligence (so we’re both in luck). Here are some quotes and lessons we can learn and incorporate:

1. Be King, not the Jack-of-all trades

cards
In various interviews, the legendary investor states:
“You only have to do a very few things right in your life, so long as you don’t do too many things wrong.”
You don’t have to be the best at everything, just one or a few is good enough. Concentrate on your “circle of competence” and know your limitations (be honest and acknowledge what you do not know). In times, concentration is better than diversification.
“Diversification is protection against ignorance. It makes little sense if you know what you are doing.”
– Warren Buffet

2. Make time your friend

time

Patience (young grasshopper…?). In some cases, it just takes time for good things to unfold. This can be reflected in his Buffett’s long term stock positions; the results in the long-run takes time to come (or else it would be called the short run).
Here’s the magic of patience coupled with a great stock: If you had invested $1000 in Berkshire Hathaway (BRK-A, Buffett’s company) in 1964, and patiently waited 50 years until 2014, you would have $18,261,630 (a whoopin’ 1,826,130% gain).
“No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
-Warren Buffett
Learning and growing takes time, remember; the expert was once a beginner.
 

3. Force yourself to form good habits

readingbooks

“Chains of habits are too light to be felt, until they are too heavy to be broken.”
– Warren Buffett
Make it a routine to do small tasks that will contribute to your long term goals. Buffett spends much of his everyday time reading and over the years has built an invaluable habit that contributes to his learning. I suggest the book: The 7 Habits of Highly Effective People by Stephen R. Covey.

4. Learn to value

sale.jpg

One of the greatest skill that an investor can develop is the ability to estimate “true” value. Whether it’s a stock, an opportunity or even a relationship, being able to know the true worth of something is always in your benefit.
Buffett states that long ago, his mentor, Ben Graham taught him:
“Price is what you pay. Value is what you get.”
“Whether were talking about socks or stocks, I like buying quality merchandise when they’re marked down”
-Warren Buffett
(good quality at a discounted price; one of the principles of margin of safety)

5. Surround yourself with people who are better than you

betterthanyoupeople

 
One of the best ways to improve your own skill set is to surround yourself with others whom are better than you, and whom you admire. Buffett went straight to work for his mentor, Benjamin Graham, without even knowing what he was gonna get paid. Warren says:
“People always ask me where they should go to work, and I always tell them to work for whom they admire most.”
Here’s an exercise:  Think/Pick out people you admire the most (try not to pick yourself) and think of the qualities that make up that person. Now pick out someone you cannot stand and notice the qualities that turn you off.
“The qualities of the one you admire are traits that you, with a little practice, can make your own, and that, if practiced, will become habit-forming.”
– Warren Buffett
It is equally important to pick out great figures and heroes to look up to, for they will provide you with quality guidelines and inspiration for continual self-improvements.

6. Honesty and Integrity are essentials

handshakehonesty

 
“Honesty is a very expensive gift, don’t expect it from cheap people.”
-Warren Buffett
It is great to associate yourself with intelligent and hardworking individuals, as it may bring out the best of you, but if they lack honesty and integrity; you may not know when that knife goes in your back.
“…when you hire someone you look for three qualities: integrity, intelligence, and energy. And if you don’t have the first, the other two will kill you. You think about it; it’s true. If you hire someone without (integrity), you really want them to be dumb and lazy.”
– Warren Buffett
It is important to associate yourself with the right people, notably honest ones; so choose your close ones carefully!

7. Always remind yourself of your long term goals

longterm goals

 
In everything you do, try to see how it will affect your long term goals. Buffett invests in quality stocks at discounted prices for the long term:
“Our favorite holding period is forever.” -Warren Buffett
You do not have to make your long term vision forever, but always plan for it; making sure you’re taking the right steps to reach it.

8. Investing in yourself is invaluable

selfmeditation

“The most important investment you can make is in yourself.”
– Warren Buffett
 At a young age, Buffett discovered investing and spent much of his time reading books about investing at the library. Knowledge is one of the best investments you can make for yourself. But it’s not the only one, your health is crucial to the equation (arguably even more important), The Oracle says:
 “Imagine that you had a car and that was the only car you’d have for your entire lifetime. Of course, you’d care for it well, changing the oil more frequently than necessary, driving carefully, etc. Now, consider that you only have one mind and one body. Prepare them for life, care for them. You can enhance your mind over time. A person’s main asset is themselves, so preserve and enhance yourself.”
f08b2e_92f31c7158744e29afc9bc3a19a6d96c
Photo by Michael Prince for Forbes
“Rule No.1: Never lose money.
Rule No. 2: Never forget rule number 1.” 
-Warren Buffett
I would strongly recommend reading “The Intelligent Investor” by Benjamin Graham; it covers the important lessons of value investing, intellectual framework in investing, margin of safety and much more! But don’t take my word for it, Buffett recommends it, as he says that stumbling upon that book was one of his luckiest moments in life.