Do we always have to learn from our mistakes? Is our life and resources we own, such as money and time, long enough for us to make all the mistakes we can make?
No, right? Our life is short, and resources are never enough. It is optimal to learn from others’ mistakes, right? This way we could save our precious resources.
Let’s discuss 8 important lessons every new investor should know. Following these can help you become a good investor and survive the tough times in the market.
Estimated read time: 3 minutes and 19 seconds
Buckle up, here we go!
Lesson #1: Not investing is a bigger risk than investing
Most of us don’t invest because we think investing is risky because of volatility, interest rates, etc. But in reality, it is riskier to not invest at all.
It’s like not fixing the leak in the water bucket. You will lose water (money) to the leak (inflation).
Also, if you understand what you are doing, where and why you are investing. It minimises your risk.
As Warren Buffett once said, “Risk comes from not knowing what you’re doing.”
Lesson #2: You don’t need a high IQ to be successful
If you observe clearly, high-IQ people caused most of the market crashes.
And the top investor we know of, like Warren Buffett, Rakesh Jhunjhunwala, and others, follow basic fundamental research with good control over their emotions.
So, a high IQ doesn’t help you become the best investor, but good EQ (like impulse control) does.
Good EQ will help you understand and learn from others’ mistakes to reduce risk.
Lesson #3: Stop comparing returns with others
We invest to protect our money from inflation and build enough wealth to achieve our goals. This is our primary task.
We all have different risk-taking capacities, goals, portfolios, etc. So, stop comparing your returns with your colleague, neighbour, and others.
Lesson #4: High-Risk ≠ High Returns (Not always)
We keep hearing high risk leads to high returns now and then. But the high risk does not equal a high return.
As we discussed in lesson #1, risk comes from not knowing what you’re doing.
Let’s say a person buys an equity stock knowing nothing about the company or market. He has made the riskiest move, but will this risk lead him to 100x or 1000x returns? Only if he is a time traveller, right?
Buying good investments at reasonable prices is the least risky move. It will help you achieve reasonably high returns.
Lesson #5: Stop thinking this time it’s different
Legendary investor Sir John Templeton said, “The four most dangerous words in investing are ‘This time it’s different.’”
Did you say this to yourself? Or does your trader friend keep repeating this?
History has shown us it is never different. Every time investors and traders believe that ‘this time it’s different’, market booms and busts happen in almost the same way, and investors lose money.
Lesson #6: Diversification is essential
‘Diversification is for losers, you must concentrate,’ is what I used to think when I read about how Elon Musk invested his entire earnings from PayPal’s sales in Tesla, SpaceX and SolarCity.
And this is what most traders believe because to make big money, you need to concentrate and not diversify.
But as life passed, I learned it is terrible advice for new investors. Concentration can make you big money but has enormous risks that only unfold with time.
By diversifying, you will minimise your risk and optimise your returns.
Lesson #7: Choose stocks & funds like a collector
Have you ever observed a collector? You or any of your friends would be interested in collecting stamps, coins, bottle caps, or tissues.
Do they collect everything? No. They select the top ones and throw away the ones with minor damage, right?
Likewise, you are likely to succeed as an investor not just by the stocks you own, but more importantly, by the ones you don’t.
In Vishal Khandewal’s words, “Create portfolios like a museum curator (choose well), not a warehouse manager (choose everything).”
“12-15 stocks and 3-5 funds are enough. You don’t need more.”
Lesson #8: You don’t need experts to handle your money
You alone are the most capable person alive to manage your money. It’s high time you believe this.
Educate yourself well. Then choose your investments well. Select like a museum curator and diversify enough. Have a good EQ.
If you follow our beginner’s personal finance checklist, you are already off with a good start.
These lessons were inspired by the Safal Niveshak post. Check out the whole post here.
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