Abnormal Returns is on a break this week. That does not mean that we are content-free this week. As we did last year we asked a panel of independent bloggers a series of questions. This year we crowdsourced the questions from readers who won a copy of the Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere for their efforts. We hope you enjoy these posts. Feel free to chime in with your own answers in the comments.
If you had a son or daughter just beginning to invest, what would you tell them to do to best prepare themselves for a lifetime of good investing? (submitted by Mark)
Answers in order of response (first to last):
Phil Pearlman (Phil Pearman): I’d tell them to take ballet. Learning to dance on one’s toes (en pointe) is the only other widely practiced human endeavor as unnatural and painful as learning to take small losses quickly.
Steven Place (InvestingWithOptions): Learn to be wrong. Traditional education trains us into thinking that we have to be right to get the grade. With investing and trading, focusing on being right will bring assymetric risk to your methodology and will eventually lead to a blowout at least once.
Bob Seawright (Above the Market): (a) Read broadly, deeply and well; and/or (b) hire wisely.
Zack Miller (Tradestreaming): Investing is a process, not a destination, honed by lots of trial and error, sweat and tears, and hurt egos. You don’t have to be the creative one, so don’t recreate the wheel. Imitate the most successful investors out there and you’ll do fine.
Robert Sinn (The Stock Sage): Read and learn as much as you can before you actually pull the trigger on your first investment. Come up with your own ideas and be weary of conventional wisdom and the hysteria of crowds.
Todd Sullivan (Value Plays): Ironically I just allowed my sons (9yr old twins) to invest a portion of their Coverdell IRA’s by themselves (Dec. 2011). I told them that since they were not going to be able to watch their investment all day long, they had to choose companies that they felt had a product or service that people were going to want for a very long time. After a few days of writing down products they felt people would want for a very long time, we researched the companies behind them. Then we looked at how expensive/cheap they were. In the end they chose Apple and Dunkin Donuts.
Ivan Hoff, (Ivanhoff Capital): First, read my blog and suggested reading list to learn from other people mistakes and then give her $5000 to lose and learn from her own mistakes.
Roger Nusbaum (Random Roger): The stock market has a down year every so often and a few times the market will go down a lot and that does not have to be a problem. The problem would be panicking after it goes down a lot. People have always blown themselves up because they’ve misused leverage. This has always happened and always will happen. This can be avoided by not using leverage. Lastly keep it simple. Simple works.
Jay (MarketFolly): Take emotion out of the equation. If you can think and act rationally when others do not, that’s an advantage. Never stop learning… the best investors will tell you that investing is a continual education.
Kid Dynamite (Kid Dynamite’s World): Do your own work. Don’t take shortcuts. Seek out conflicting opinions not conforming opinions.
Jared Woodard (Condor Options): Specialize. The parts of investing that any smart person can do will keep becoming more automated and commoditized over time. Good returns will require specialized knowledge and tools, so study quantitative disciplines and develop expertise in some important part of the economy.
Tom Brakke (the research puzzle): Study financial history.
Interloper (The Real Interloper): Bernstein quote describes this: “Return are best where capital is scarce”. Figure out what others are doing and do something else. (Related: get used to being lonely)
Rob (TechInsidr): Look before you leap. It’s absolutely critical that you are familiar with the numbers before taking a short or long position. Don’t make a single trade without reading 10-K / 10-Q filings and doing your research.
CJ (Crackerjack Finance): The best advice to become a great investor is become an expert on the process of investing. Getting one stock/trade right for a unique reason has limited value because there is no ability for replication of the results. It is the process of investing and deep knowledge of individual stock sectors and companies which provides enduring advantages.
Toby Carlisle (Greenbackd): Inspired by Michael Pollan’s edict for healthy eating (“Eat food. Not too much. Mostly plants.”), for good investing I’d propose “Buy value. Diversify globally. Stay invested.”
DH (Dynamic Hedge): If they were serious about investing as a career I would advise them to dive into the CFA material. Even if you never get a designation, most of the technical stuff you need in your toolbox can be found in those textbooks.
Walter (Sober Look): Invest when it feels like the world is about to end. Stay out when everyone is talking about investing.
Eddy Elfeinbein (Crossing Wall Street): The value of hard work. Nothing focuses the mind for disciplined investing like knowing that a portfolio is merely long hours in paper form.
Gary Evans (Global Macro Monitor): First, invest in yourself. That is, acquire as much knowledge as possible and analytical skills in a wide variety of disciplines and develop the ability to abstract yourself from the present. Become a mathematician, economist, political scientist, psychologist, sociologist, and futurist.
David Merkel (Aleph Blog): Read widely, and become a good overall thinker, but be sure to read some economic history, so that you get a broad idea of how volatile things can really be. Then read classic works by different types of investors, and see what fits your skills and demeanor best.
Josh Brown (The Reformed Broker): Buy shares in one stock, preferably a company they know about like Coke or YUM Brands – and read every filing, every news article for one year. This is how you learn what’s important and what’s just being written for the sake of having things to write about.
Eric Falkenstein (Falkenblog): a) Investing is mainly about sales and marketing. Expect misrepresentation typical in sales.
b) Form coalitions by doing favors for people. Finance is about relationships more than assets and strategies.
c) If you don’t have some special edge, you should be in the least risky asset class possible to avoid paying too much.
Jeff Miller (A Dash of Insight): This is the easiest question. A long-term investor needs to understand a key point: You are not a market-timing genius and neither is anyone selling services to you! There is a long-term path to progress, with several good ways to get aboard. Be interested, be watchful, but do not be too confident.
Mick Weinstein (Covestor): Develop a plan and keep it simple. Then assess every investment opportunity against that simple plan.
Brian Lund (bclund): I have both a son and daughter and I will tell them three things when they are old enough. First, understand that ultimately you are responsible for the outcome of your investments and that they shouldn’t blame bad markets, bad advisors, or bad luck if they lose money. Secondly, always try to stay as objective and unemotional as you can about what you invest in. And lastly, remember that discipline and risk management is the key. You can lose all the profits from five well managed trades or investments with one poorly managed one.
Tim (The Psy-Fi Blog): I’d get them to spend a year doing menial work to earn some money and then I’d tell them to think about how they’d feel if they lost that money every time they traded. Nothing helps to debias an investor more than a fear of failure and an understanding of what money really means.
Jeff Carter (Points and Figures): Patience, don’t pick trends and if you are investing in stocks, emulate Gene Fama’s Efficient Market Hypothesis. You can’t beat the market.
Eric Swarts (Market Anthropology): Have them start with a book that is easy and fun – but both topical, comprehensive and eye opening, such as Maggie Mahar’s book, “Bull! A History of the Boom and Bust”
Thanks to all the bloggers for their participation. Stay tuned for another question tomorrow.