How to Invest Money: Wisdom from the Greatest Investors of All Time

How to Invest Money: Timeless Advice From The Greatest Investors

When I wanted to learn how to invest money, I turn to the absolute best investors of all time.

Warren Buffett, Charlie Munger, Benjamin Graham, Phil Fisher, David Dodd, to name a few.

I’ve been an investor and online entrepreneur over 15 years and experienced huge bubbles and massive panics in many asset classes; from the stock market, to real estate, commodities and currencies.

I’ve read over 100 books on investing and finance and have explored many different theories and strategies: value investing, swing trading, technical analysis, short-selling, options, real-estate, lending and biographies on the wealthiest people who’ve ever lived.

Through both hands on experience and lots of reading, I’ve compiled this list of ideas that all the great investors agree on.

I am confident that if you adsorb these lessons, you will lose far less money than the average investor.

Investing is easy, except in practice.

Human psychology is what makes investing hard, not the “math” part.

Whether you buy stocks, bonds, real-estate, farms, websites or some other asset class; it actually doesn’t matter all that much.

It’s your temperament. Your emotional control. Your ability to think independently.

Do you panic in bad times? do you get greedy in good times?

This is what impacts your investment performance. Not your asset class.

You can’t just read about this stuff, you need to get your hands dirty and invest your own, real money.

Once everything is real, not only will you take investing more seriously, but you’ll be able to observe your own feelings towards the fluctuations.

When you having been saving for years or decades and you watch that “hard earned money” start to vanish, “buy and hold” doesn’t feel so easy.

Likewise when prices are rising to absurd highs, it’s not easy to start taking profits off the table.

Because of course, “What if it goes higher?”

Buy High, Sell Low

Do not pay excessive (or any) investment fees

In case you haven’t heard, 99% of active funds underperform the market.

The biggest reason is the fees.

John Bogle in his book “The Little Book of Common Sense Investing”, he explains that since the market is just the sum of all the investors trading with each other, if fees are being taken, it makes it virtually impossible to beat the average.

The little book of common sense investing

View on Amazon

Therefore, the best strategy is to mirror the index and minimize your fees. This advice is echoed by the world’s greatest investor, Warren Buffett.

With the invention of low-cost, passive ETFs for stocks and bonds, and publicly traded REITs, there is no reason to pay fees higher than 0.10%.

If you have bought in to some adviser who claims they will beat the market, the chances are 1 in 100 that they will under-perform the index fund with low fees.

For some sobering context, the difference between earnings the same 7% per year, except with a 1.38% MER rate can be millions of dollars in a lifetime on a stock portfolio.

The only value an investment advisor can offer you is to keep you calm during a panic or keep you from making other critical mistakes.

But, for all you know, they may be right there in a panic with you.

The same is true of you, the more you trade and incur expenses, the more this takes away from your overall return.

Buy and hold is almost always the right policy.

How to Invest Money: Lesson #2 ~ Keep investment expenses to the absolute minimum.

Be Ready.

Truly great opportunities, that are right in your sweet spot, will be very rare in life.

In Malcolm Gladwell’s book “Outliers”, he makes a compelling case that success is a mix of both luck and ceasing the moment.

Bill Gates worked hard to build Microsoft. He famously said “I never took a day off in my twenties. Not one”.

Nobody can argue that Bill Gates was smart and he worked hard. But also;

His timing was lucky; for computers were in their infancy. What if he was born 30 (or 3,000) years earlier?

His circumstances were lucky, being one of the few students in the world with access to a computer. Most universities didn’t own computers.

He lived in a capitalist society where he was free to pursuit his interest and talents. What if he was born in the slums of India?

The bottom line is: Bill Gates is successful because he took advantage of his luck.

Look at any successful person, and their lucky circumstances will become clear, in addition to their hard work and good decisions.

Fish in a barrel.

In investment, the best opportunities are sharp declines in high-quality asset prices.

For example, if the S&P 500 drops 25% in a 12 month period, buying should be easy (it’s not, it’s usually downright terrifying).

It follows that the best way to capitalize on a price decline is to have sufficient cash on hand.

Cash is a bad investment, especially on paper. It is guaranteed to lose purchasing power.

So why keep it lying around?

Warren Buffett says, “I keep enough cash around so I can sleep at night”.

When you are fully invested in a declining market, the optimal strategy is to do nothing and simply wait for prices to recover.

Of course, most investors can’t do this.

They don’t have courage to do nothing (understandably) while their net worth vanishes before their eyes, and end up making big mistakes like selling near the lows (“because it might go down more”) and getting back in once prices increase (“because it’s going back up!”).

Their panic causes them to act.

That’s why having some cash on hand not only protects you from major declines, but actually makes you welcome them.

Of course, having cash is hard too when you watch the market soar. You will be tempted to get back in, especially if you check prices frequently.

By Cash, equivalents are ok too (short-term treasuries, for example)

How to Invest Money: Lesson #3 ~ Always keep cash around

Know where you’ll die, then never go there.

Warren Buffett, when asked about leverage, famously said:

“If you’re smart, you don’t need it; if you’re dumb, you have no business using it.”

Charlie Munger, the great inverter, described the three ways to financial ruin:

“Drugs, Liquor and Leverage.”

Investing is already stressful enough for the majority of investors, and leverage just makes it 2x – 3x worse than it needs to be.

In addition, when you invest rationally, you have low chances of losing any money, let alone all your money. However, when using leverage, if your assets fall low enough in price, you can be completely wiped out and be at the mercy of your creditors.

The one exception I would mention is a residential mortgage on a detached home, with a fair interest rate over a long amortization period, which is a very common form of leverage used by the general public.

Even in these instances, if your mortgage(s) are too high relative to your personal and rental income, you can be in a difficult situation if you become unemployed, or have prolonged rental vacancies or subject to sudden and substantial interest rate fluctuations.

How to Invest Money: Lesson #4 ~ Don’t Borrow to Invest. (Your home is not an investment)

Clearly understand investment vs speculating, gambling and “playing the market”

The best definition of investing I’ve read was by Benjamin Graham, the father of value investing.

“An investment operation is one which, upon thorough analysis promises safety of principal and an adequate return. Operations not meeting these requirements are speculative.”
The Intelligent Investor, Benjamin Graham, The Revised Edition, page 18

There is nothing wrong with speculation. It’s just important that you know the difference and act accordingly.

A major component of an Investment, consistent with many of the greatest investors, is to preserve your capital.

Benjamin Graham went on to say

“The most realistic distinction between the investor and the speculator is found in their attitude toward stock market movements. The speculator’s primary interest lies in anticipating and profiting from market fluctuations. The investor’s primary interest lies in acquiring and holding suitable securities at suitable prices.”
The Intelligent Investor, Benjamin Graham, The Revised Edition, Page 205

 

Warren Buffett’s only two rules of investing are:

#1 – Don’t lose money
#2 – Don’t forget #1

Whether an asset purchase is an investment or speculation is relative to the buyer.

Imagine two “investors”, Alan the Analyst and Peter the Plumber

If Alan the Analyst, after much research, and patience, sees that a company he’s been following has come down significantly in price, Alan can intelligently make an investment in that company’s stock.

If Peter the Plumber hears from a friend that this same company would be a great investment and purchases some stock, this same transaction would be a speculation by Peter.

An investment requires: thorough analysis, promise of safety and adequate return. Everything else is speculation.

How to Invest Money: Lesson #5 ~ Stick to Investments, avoid Speculation.

Minimize Risk by Sticking to High Quality Assets

Related to speculation.

Hear about that hot new penny stock that’s gone up 300% in the last week?

How about that up-and-coming gaming app that got 500 million downloads in 1 year?

That drilling company issuing high interest bonds so it can explore for new oil fields?

Shall I continue?

The majority of common stock that qualify as both having the promise of security and adequate return will be large companies, leaders in their industry, with a long history of reasonable earnings growth.

The bonds of the above mentioned companies, may also qualify as a high quality asset. Federal bonds in developed nations are also considered to be high quality.

There is already significant systemic risk in financial markets, there is no need to amplify it.

How to Invest Money: Lesson #6 – Stick to high quality assets (margin of safety)

Should I “invest” in gold, silver and other rare metals?

By nature, a precious metal generates no return or income. Therefore any potential gain would be a speculation that someone will pay more for it in the future, usually during times of panic. Therefore, it cannot be an investment.

 

However, there are many instances through-out history where societies lose confidence in their paper currencies (including in the United States) and silver and gold became the most trusted medium of exchange and store of value.

It was used by great civilizations (Romans, Egyptians, Persians)  that existed longer than our modern nation-state democracies, and certainly longer than our current fiat system, which only sprung up in 1971 when Nixon suspended convertibility of the dollar it gold.

It’s important to have the right perspective on this. As long as you have high quality assets like stocks, and real-estate, those assets will still have value regardless of what medium of exchange is en vogue at the time.

Your house won’t cease to exist if people don’t like dollars, or euros or whatever. You will need to use some kind of medium to buy food from the farmer.

Holding just a small amount of physical silver or gold n your possession (say, a few pieces of jewelry, or antique coins) protects you against a possible negative black swan with currencies, but it won’t produce a return for you.

So at best, it’s an insurance plan for a very rare event.

How to invest money: Lesson #7 ~ Don’t invest in precious metals. But don’t feel too bad to have some in the forms of useful consumer goods.

How to own all the rice in the world, forever.

In ancient times, there lived a wise man who was summoned by a generous king.

The king was a big fan of his books and wanted to offer him a reward.

“Wise man, your words forever changed my life and our great kingdom. For that, I will willing to grant you any wish” The king said.

The wise man pointed to a 64 square chess board, and says to the king

“Your Majesty, thank you for your generous gift. My ask is meager. Upon that chess board, place 1 grain of rice on the first square, 2 upon the second, 4 upon the third and continue to double the grains until you reach the 64th square. That is all I ask.”

“That it is all? Surely your great wisdom is worth more than mere rice on a chess board? No diamonds or lands?” The king asked, puzzled.

“That is all. I will return in the morning to collect the rice. Thank you, my lord”.

To his shock, and silent amusement, the king was informed he committed over 536,500,000 grains of rice to the wise man, which was more rice than was available in the entire kingdom.

This is the power of compounding, and it is not intuitive for humans.

Einstein on Compound Interest

Stansberry Research did a great comparison of the effect time and consistency has on compounding.

Imagine two people, Tina the Twenty Year Old and Frank the Forty Year Old.

Tina, at age 20, has $2,000 and invests $300 per year in her investments.

Frank, at age 40, has $10,000 and invests $5,000 per year.

By age 70, who will have more money?

Tina, surprisingly, will have triple the amount, because of her 20 years of compounding. Even much bigger investments don’t make up for the time difference (compounding period).

How to Invest Money: Lesson #8 ~ Understand Compounding – Start Early, Be Consistent. 

Don’t be a dumb Bison

Native Americans historically used a technique called “The Buffalo Jump“, where they made massive amounts bison jump off a cliff to their death.

All they needed to do was get the herd moving in the cliff’s direction, and the bison would blindly follow the herd.

Needless to say, this is much easier (and safer) than hunting. Simply wait for the herd to jump off the cliff, then collect all the spoils.

In investing circles, this idea is known as contrarian investing. It means to go against the herd.

In The Intelligent Investor, The Revised Edition, Jason Zweig says

“The intelligent investor dreads a bull market, for it makes his purchases more costly.”

Most people feel good and happy when their stocks go up. But you should only be happy if you are cashing out.

Phillip A. Fisher, Author of Common Stocks and Uncommon Profits, describes the importance of being a contrarian:

“The former eager buyers of the stock become discouraged sellers. … At this point the stock might well prove a sensational buy”
Common Stocks and Uncommon Profits, Philip Fisher, Page 93

If asset prices are falling, by definition it means there is more supply (sellers) than there is demand (buyers).

Therefore, if more people are selling (prices are falling), you want to be a buyer.

In other words, you want to do the opposite of what the herd is doing.

Herd Mentality

How to invest money: Lesson #9 ~ Don’t follow the herd.

Bringing it all together.

Hopefully this wisdom will show you that there is no “right way” when it comes to investing.

There certainly are wrong ways, though.

To re-cap the 9 timeless lessons of investing:

  1. Investing is simple, except in practice. Psychology is the hard part of investing.
  2. Minimize your fees: this includes MER, trading/management fees, taxes etc
  3. Keep Cash (Equivalents) Plentiful: Flexibility to capitalize on good opportunities.
  4. Don’t borrow to invest: It gives you a chance to go totally broke. Don’t take that chance.
  5. Invest, don’t gamble: if there is no promise of safety, it’s not an investment.
  6. High Quality Assets: anything else is not worth the risk
  7. Don’t invest in precious metals: They don’t produce any return.
  8. Compounding, the 8th wonder of the world: Time & Consistency are the keys.
  9. Oppose the Herd: Try to do the opposite of what “most” people are doing, especially in extreme circumstances.

To invert these lessons, think of it this way:

  1. Don’t look at stock quotes, and you can’t get psychologically impacted by prices.
  2. Don’t pay investment fees.
  3. Don’t fully invest in anything.
  4. Don’t use leverage.
  5. Don’t confuse speculation with investment
  6. Don’t buy low-quality financial assets
  7. Don’t buy precious metals
  8. Don’t wait to invest
  9. Don’t feel good when stocks go up or Feel good when they go down.

 

 

 

 

 

 

 

 

 

Barry Deen is an online entrepreneur and investor with over 20 years experience building, acquiring and selling businesses.