myths & traps

 INVESTING    amusement    average humans    myths & traps    finally    notes & references

Common Investing Myths and pitfalls that we should all know by now:

  • Just because a company builds a better mousetrap (or electric vehicle, or miracle drug) does not mean that their stock price will reflect that fact.
  • In the long run (the only “run” you should be interested in) stock prices of companies have surprisingly little relation to how “innovative” or “well-managed” they are. They are affected by sentiment1 as much as anything else. Profits come and go.
  • If you find yourself tempted to ask the question “what stock should I buy,” resist the temptation. If you do ask, don’t listen to the answer. If you hear an answer, promise yourself that you will ignore it.
  • “Beating the market” assumes that you know something that the market does not. The reality is that the market is far more efficient2 than you can imagine.
  • 90% of all trading is done by large, institutional investment firms (or their software, to be exact.) They are your competition.

Life is just too short to spend time worrying about your portfolio.

As humans we are absolutely conditioned to expect past trends to continue. It is one of our most basic instincts. It may help you in a snowstorm, but not in the market.

Learn to regard market movements as random.

“Buying low” and “selling high,” while great in theory, are not actually achievable even 50% of the time.

Avoid “news” of any kind. Stick with well-qualified authors of books,3 preferably those written decades ago. The principles have NOT changed. This time is NOT different.

If you miss the thrills and drama of the news cycle, or “seeing how well you are doing” daily or monthly, set up a stock picking contest, using fake money. At worst, set aside 5% (at most) of your real portfolio to play in. Warning: it can encourage bad habits.

Smart people are humble, and able to admit when they have made a mistake. In fact, they rejoice in learning that they have made a mistake, because going forward they will be less wrong.

  1. Warren Buffett: “Charlie and I have never had an opinion on the market,” he stated at Berkshire Hathaway’s AGM in 1994, “because it wouldn’t be any good and it might interfere with the opinions we have that are good.” “I have nothing to add,” said Munger. ↩︎
  2. see “Efficient Market Hypothesis” in “notes & references” ↩︎
  3. You can rely on the master list by Taylor Larimore ↩︎