Lessons I've Learned about Investing

I try to consume a lot of books. My goal is three or four a month, with many being about business, finance, or investing, but I like to mix in some history and biographies as well. I don’t try to remember everything I read. Instead, I hope that with each book I can take away two or three key ideas. Over time, hopefully those takeaways compound on each other and make me a little better at my job.

This library of quotes, ideas, facts, and strategies has shaped my investing philosophy, both personally and professionally as the Director of Investments at CooperDavis. So, rather than giving you another market recap this month (stocks are up and bonds are down so far this year) I wanted to share a few investing lessons that have stuck with me. Some may seem obvious, but I believe they are all important.

There will always be uncertainty in the market.

I recently finished David Booth’s new book, Stay Calm, and one of the main themes is that uncertainty is not a problem to be solved. It is simply part of investing.

Humans are not very good at predicting the future. We can make educated guesses, but nobody consistently knows what the economy, interest rates, politics, technology, or markets will look like two or ten years from now. That uncertainty is part of why stocks are considered a risk asset and why investors have historically been rewarded for owning them.

The temptation is to wait until things feel more certain before investing. The problem is that there will always be another reason to wait. Since 1926, U.S. stocks have returned roughly 10% per year on average, compared with roughly 5% for bonds. Those returns didn’t come in a straight line, but investors who stayed invested were compensated for enduring the ups and downs.

Own a diversified portfolio.

Harry Markowitz, the Nobel Prize-winning economist who helped pioneer modern portfolio theory, famously called diversification “the only free lunch in investing.” I like that.

You can’t miss the boat if you own the market. Think about NVIDIA. You know who has owned NVIDIA for the past 25 years? Anyone who bought and held an S&P 500 index fund. They didn’t have to predict that NVIDIA would become one of the most valuable companies in the world. They simply owned it as part of a diversified portfolio and let the winners emerge over time.

That is the power of diversification. We don’t know which investments, companies, countries, or asset classes will perform best over the next 5, 10, or 25 years. A diversified portfolio allows us to participate in the winners without having to identify them in advance.

The goal isn’t to predict the future perfectly. It’s to build a portfolio that gives you a chance to benefit from whatever the future brings.

Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

Don’t confuse activity with progress.

Wall Street, financial television, and social media are built around getting your attention. There is always something to worry about and always something new to buy.

Turn on CNBC and someone is explaining what you should buy or sell. Open your phone and there is another headline telling you why the market is about to crash, or why you are missing out on the next big opportunity.

Most of the time, investing doesn’t require nearly as much activity as the financial industry would have you believe.

Charlie Munger once said, “The first rule of compounding is to never interrupt it unnecessarily.” I love that quote. Every unnecessary decision creates another opportunity to make a mistake. Sometimes the best investment decision is simply to do nothing.

The best investing plan is one you can stick with.

A portfolio can look perfect on a spreadsheet and still be completely wrong for an investor.

If you are constantly worried about your investments or losing sleep when the market falls, you probably have more risk than you should.

Investing is part art and part science. Historical returns, valuations, and probabilities matter, but so does the person who has to live with the portfolio.

The best plan isn’t necessarily the portfolio with the highest expected return. It is the portfolio that gives you a reasonable chance of reaching your goals while allowing you to stay invested when things get uncomfortable.

Time in the market beats timing the market.

There will always be a reason to wait. The market looks expensive. Interest rates are too high. A recession is coming. Elections are approaching. Geopolitical tensions are rising.

Sometimes those concerns are legitimate. The problem is that knowing something is a risk is very different from knowing what the market will do about it.

Successful long-term investors generally aren’t the ones who perfectly predicted every downturn. They are the ones who created a plan, diversified appropriately, stayed disciplined, and allowed time and compounding to do the heavy lifting.

Hopefully, this gives you a little better view into how we think about investing here at CooperDavis. If you ever want to have a deeper conversation about our process, or know someone who would benefit from that conversation, reach out to your advisor. We’re always happy to talk through it and help however we can.