The famous proverb "the best is the enemy of the good" reminds us that the search for perfection often has a counterproductive effect. By wanting to do too well, we have every chance of spoiling what was good.
This maxim applies to many areas of life, including the stock market. Perhaps you have already missed out on a magnificent investment by overanalyzing it, hesitating and endlessly weighing the pros and cons. If you are attracted to a beautiful woman but hesitate for half a century before deciding to approach her, only one thing is certain: by then, she will have lost her splendor...
Good deeds (I'm not talking about helping grandma cross the road: we're on a site that talks about the stock market 🙂 ) are like good wine: they improve with age.
In any case, perfection does not exist, it is nothing more than an illusion sold in magazines. And even if it did exist, it would be a nightmare. Imagine a dialogue with a person who tells you the most sensible thing in the world in every line, who knows everything about everything, is able to answer absolutely all your questions and corrects each of your inaccuracies. This feeling of talking to a computer would get on your nerves very quickly!
To succeed in the stock market, you don't need to know everything or always make perfect decisions. For example, investing your money little by little, as you save it, prevents you from obsessing over perfect timing. There are interesting stocks regardless of the stock market cycle and the valuation of the market as a whole.
Likewise, it is normal and even beneficial to make mistakes, as long as you learn something from them. To limit the impact of your mistakes, there is only one solution: diversify as much as possible, so that your bad investments do you as little harm as possible.
The recipe for achieving financial independence is not as complicated as your bank would have you believe: spend less than you earn and invest that cash over time in quality companies. Then sit back for 20 years, watching the dividends roll into your account and grow over time. Don't spend your dividends, but reinvest them in new stocks that will in turn distribute dividends. Don't panic when your stocks fall, but think about whether it's not the right time to buy even more.
Avoid highly cyclical, technology and financial stocks as much as possible. Choose companies that offer essential products or services that are likely to still be in demand in 30 years. Do not grossly overpay, regardless of the company's qualities and prospects.
If you can't figure out whether a stock is currently trading at a good price, there's another option besides buying or not buying it: invest only a fraction of the amount you've decided on, then another fraction later, and so on.
Once you have invested in a security, remain as passive as possible. Let time and compound interest do their work rather than wondering each time if it is not the time to sell after a gain of 10%.
Good companies take care of themselves. Unlike a pet that needs to be cared for or a houseplant that needs to be watered regularly, investments in the best companies do best if you never touch them again.
Focus your time and energy on the next investments you want to make, not on questioning the ones you have already made. Keep the big picture in mind, focus on the essentials, and don't let yourself be overwhelmed and distracted by the endless stream of unwanted information.
Accept that you can't predict and control everything. Having scrutinized all the figures of a company and read everything that has been written about it does not protect you from failure. There will always be a "black swan" somewhere ready to emerge from who knows where. There is theory and there is reality.
I've made dozens of mistakes in the stock market, bought my share of lame ducks and zombies dressed as princesses. But I'm still here today, I've gotten back up every time and I know that all these failures won't stop me from reaching my goal.
In my opinion, the worst financial mistake is not to invest for fear of making a mistake or losing your money. Even if you buy a rotten stock and lose 50% of your investment, tell yourself that you still have more money left than the one who bought without really knowing why a new useless gadget that will soon end up in his cellar.
All these stocks that I bought one day will work for me until the end of my days. Some are better than others, just like there are good and bad employees in every company. But each of them has its role to play and contributes in its own way to making my dream come true.
And it's perfect like that.
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Thank you bro for this very nice article.
You are 100% right, it's perfect like this.
I have often been asked by readers recently what I would invest in right now and I prefer to tell them to try to avoid the markets at the moment because they are too expensive. I would like to prevent them from making the same mistakes I made in 2000 when I was just starting out in the stock market.
However, on the other hand, if I had not made such a miserly mistake at that time, I would not have the perspective I have today. It is impossible to learn from books what it feels like to see half of your savings go up in smoke. These beginner's mistakes taught me a lot not only about what to avoid and what to do, but above all about myself, about my way of reacting, about my propensity for risk.
Practice makes perfect. Mistakes make perfect.
I keep making mistakes, and so I keep learning. The stock market is a very interesting subject to study!
We never stop learning about the stock market and that's also what makes studying it so exciting. In any case, I'm already happy with my progress compared to when I started... When I think back to my first purchases in 1998, I laugh: They generally boiled down to a company name that I found cool, a lousy rumor or a chart that spoke to me 🙂
Hey, that reminds me of your brother… 😉
I love your pen!
This sentence particularly struck me: "Even if you buy a rotten stock and lose 50% of your investment, tell yourself that you still have more money left than the person who bought a new useless gadget without really knowing why that will soon end up in their cellar."
And, even though it's hard to lift the princesses' dresses to see if there are any unsavory (zombie?) things hiding there, I'm going to try to never fall in love with them.
Thanks DSwissK for your nice comment. Never falling in love in the stock market is indeed a great thing! 😉
Yes, thanks for the wise reminder. There's some Warren Buffet in there!
I found the same sentence as DSwissK: "Even if you buy a rotten stock and lose 50% of your investment, tell yourself that you still have more money left than the person who bought a new useless gadget that will soon end up in his cellar without really knowing why." This is an interesting and positive philosophical approach to losses! But humans probably naturally tend to compare their loss to no loss ("ah, if I had been in cash", for example) or even to better investments ("ah, if I had bought such and such a stock or asset", for example) rather than to what could have been worse.
That said, since spring 2017 I have been out of markets that I do not understand (anymore), respectively that I find artificially high, inflated by the money printed in huge quantities by central banks since 2008. This can be seen as a mistake, but I sleep soundly. But it is true that I missed a great period; however, it could be even more wrong to enter the market today. In reality, I think that only a big crash could justify my exit in 2017 and allow me to re-enter.
You are right Laurent Martin, emotional management of losses is one of the biggest challenges in the stock market. Losses generate stronger emotions than gains, as Daniel Kahneman demonstrated ("the pain caused by a loss is felt more strongly than the pleasure provided by a gain of the same magnitude").
Waiting for a crash to re-enter the market is an option, but I follow a different strategy: I build my portfolio little by little, every time I have cash available. I am not a fan of cash that does not work. Of course I am exposed in case of a big fall, on the other hand at least I receive my dividends regularly. Finally, I have been expecting a crash for 3-4 years already and this shows how useless forecasts are and that sometimes the best is simply to stay invested without worrying too much.
I occasionally sell a position that I believe is overvalued, but I never liquidate a quarter or half of my portfolio. Furthermore, I generally find opportunities regardless of the valuation of the market as a whole. For example, last night I took advantage of Altria's 6% drop to buy a slice. All because quarterly results missed expectations by 2 cents per share...
I am a bit between you two in terms of approach. Like Laurent I find that the markets are out of place at the moment and also since 2017 I have lightened (but not liquidated all) my positions. I have mainly reallocated my assets to cheaper stocks. However, as I am hardly finding any opportunities at the moment and my cash position amounts to around 30%. As a dividend, I do not like cash and I would like to avoid having so much of it. But for the moment I can't do it.
I think the goal is not to make predictions about the market, to want to anticipate when it will fall, etc. On the other hand, it is about managing risks. When prices are so high, you have to cover your back, even if the price to pay is to miss out on a price increase for several more months. Sooner or later the markets will correct….
Thanks for this article!
Besides, I recognize myself a little. As you say, mistakes are beneficial for our learning in financial education.
To reassure readers, there is a time between going from a bull market to a bear market. This time can last for a certain period of time, on the order of a few quarters or a few years. I do not know. Nevertheless, there are opportunities provided that one is selective.
I agree with you on the high cost of stock markets. The majority of your readers are waiting for a real bear market to position themselves cheaply. It is a decision that must be respected. You don't lose anything with cash unless inflation manifests itself more significantly.
Cdt.