We don’t want to make mistakes, do we? We wish that we would be able to avoid committing the mistake in the first place. If we happen to make mistakes, then we shall try to learn as many lessons as possible.
While it’s good if you are making mistakes in investing and learning from them, but won’t it be better if you could learn the same lessons from other people’s mistakes? You would save a lot of time in that, won’t you?
So, learn from the important investment lessons that I wish I had learned earlier. I hope that none of you would have to experience any of these fatalities in your investment journey.
“Learn from the mistakes of others. You can’t live long enough to make them all yourself.”
Eleanor Roosevelt
Three Lessons We Will Be Covering:
1. The Art of Diversification
While starting our investing career, it’s often advised that we should diversify as much as possible. Failing to do so will expose us to tremendous risk.
But my role model, Warren Buffet, on the other hand, had famously said, “Diversification is protection against ignorance. It makes little sense to diversify if you know what you are doing.”
My Personal Experience with Diversification
After learning about the saying, I stopped listening to other people regarding diversification. So I began my investment journey with only one stock in my portfolio.
I thought I would do fine, as Buffet’s quote was on my side. But to my dismay, I realized that I had lost more than 20% of its value in just a couple of months. Even at that time, I was reluctant to diversify. So I held that stock for some more time before finally selling it at a loss of more than 30%.
It was indeed one of the most difficult moments in my life.
Later, I reread that Buffet quote again, this time trying to grasp each and every word. I stumbled upon the part “…if you know what you are doing.”
Oh No!
It was at that time I realize that I hadn’t been knowing what I had been doing. Despite having researched the stock long before buying it, I had failed to realize that many things weren’t going great in that company. Many customer complaints, new competitors arising, internal conflicts, and so on.
In a sense, I didn’t know what I was doing. I had fallen into an investing psychological trap.
LESSON: If you know what you are doing, then you don’t have to diversify, but remember, you must know what you are doing in the first place.
2. There Is No Get Rich Quick Scheme
Most of us are attracted to money, aren’t we? With minimal effort, we would like to see a rise in our wealth in no time.
The only thing I thought for a long time after watching The Wolf of Wall Street for the first time was the quick way to get rich.
I searched online to find these ways. Most of them suggested trading in the stock market would make us rich in no time, just like portrayed in The Wolf of Wall Street. So I hurriedly discussed the idea of buying and selling stocks to my parents. But they didn’t allow me to do so, at least not at that age.
As I so wanted to see the practical applications of the get rich quick scheme with the stock market, I shared my idea to a few of my friends. One of them found it very interesting, so he decided to look forward to it. Miraculously, he was able to convince his parents to allow him for trading in the stock market.
He started buying stocks that were popular at that time without much thought afterward. Everyone was talking about those stocks on the internet, so I thought he could actually make a big profit with such in-demand stocks.
A few days passed by, it seemed to be going fine. It wasn’t until one day when the stock market crashed down like never before. The prices of these once-popular stocks came down hurriedly. Their prices plummeted in no time, losing 25% on an average stock, in a matter of days.
Similar to The Wolf of Wall Street, my friend had to lose it all. It was too late to realize that we were trying to achieve something that wasn’t there in the first place.
LESSON: You won’t find a get rich quick scheme, not at least in the stock market. You never know when the get rich quick scheme will turn out to be the get poor quick scheme.
“If you see a get rich quick scheme, that’s someone else trying to get rich off you.”
Naval Ravikant
3. Stocks ≠ Stocks
What do I mean by stocks not being equal to stocks?
I was also asking the same question before learning about these amazing insights from nonother than Benjamin Graham, the greatest value investor world has seen.
Graham’s book, Security Analysis, has extensively mentioned this wisdom. Warren Buffet says that Security Analysis is one of the most important books for an investor. So why not pick it up and give it a try?
Anyway, when we buy a stock, what most of us don’t realize is that we are now an owner of the company. Earlier, I used to buy stocks, then wait for its quarterly or annual reports to arrive. I would analyze these reports and make further decisions. In doing that, I was being very passive.
I forgot to realize that as a shareholder of the company, I have certain rights. One of my rights was that I could now go to major meetings conducted by my company to learn more about it – for example, the Annual General Meeting. If I wasn’t satisfied with my company’s workings, I could express my opinion there. What if someday, my opinion turns out to be a major blessing for my company’s prospect.
So in these ways, you can become very active and gain extensive knowledge about your stock. Also, do remember that the shareholders of the company are the most powerful people in that organization. With the consensus of other shareholders, you can even change the CEO if you don’t find him/her benefitting the company.
LESSON: Change your mindset that stocks are merely stocks. When you own stocks, you become one of the most important people for that company.
“A stock is not just a ticker symbol or an electronic blip; it is an ownership interest in an actual business, with an underlying value that does not depend on its share price.”
Benjamin Graham
We’d love to hear what lessons you have learned from your investing experience so far. And if you haven’t yet started to invest, then which lesson would you like to carry when starting your investing journey?
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