Famed investor and billionaire, Charlie Munger pointed out the importance of learning from the experiences of others - more specifically, those who have come before us.
An infallible way of becoming a better investor is by learning from the experience of successful investors. This would help you avoid the pitfalls they fell into, and attain their level of success within a shorter time.
Sometimes the anxiety that comes with managing our finances can overwhelm us. Learning from the experience of others better prepares us for these challenges, and forces us to reassess our strategies.
So, based on the habits observed in successful investors, here are ten ways to improve your financial standing.
First-mover advantage does not only apply in venture capital and start-ups. Its principles can also be observed in personal investment.
Thanks to the power of compound interest, the earlier you start investing, the less you may have to save to reach your goal, thanks to the potential for long-term compound growth.
For example, you want to save $1 million by age 65.
If you start by age 25, you would need to save $5,720 a year to reach that goal.
If you’re starting a decade later (age 35), you would need to save $11,125 a year to reach that same goal.
Time is the most valuable resource when investing.
“The big money is not in the buying or selling, but the waiting.” - Charlie Munger
“Live within your income and save so that you can invest. Learn what you need to learn.” — Damn Right! : Behind the Scenes with Berkshire Hathaway Billionaire Charlie Munger
We all seem to know that a company can only declare profit if it spends less than it earns.
So why don’t we operate according to this principle in our financial lives?
The gospel of common sense has been preached for eons, but many people disregard this simple principle in the quest to get wealthy for more complex, desperate, and audacious mechanisms like playing lotteries or investing in highly leveraged financial products.
The only way you can have extra cash to spare (and invest) is if you live within your means, which entails spending less than you earn.
This does not mean denying yourself privileges and necessities, but striking a balance between what you need and what you want.
One overlooked benefit of living frugally is the character development benefits that come with it. If we train ourselves to live within our means, we would turn out to be better money managers and not get carried away when we have loads of money.
There is a popular adage that says ‘One road does not lead to the market’. This implies there are many ways to get to the market. The same with investments. Highly effective investors are masters of diversification. They know that investment is not a sprint, but a marathon with many cycles and unforeseen challenges.
While you can’t rule out risk outright, diversification helps to reduce the effects of these risks on your portfolio. For example, diversifying into gold or dividend-paying stocks helps to reduce the effect of inflation on your portfolio. When you diversify, you have more options to keep getting returns whatever the economic cycle.
The quality of your investment decisions is predicated on your depth of knowledge and experience.
You can only go thus far with limited knowledge. In a world that is constantly evolving at neck-breaking speed, the need to be learning continuously cannot be overemphasized.
Learning improves your financial literacy. It provides the knowledge and skills necessary to make us better money managers.
Through constant learning, you know which investment choices are best for you at a particular time. It also saves you fees which you would pay to portfolio managers to manage your finances. Plus, it gives you the confidence to carry out your research and believe in your conclusions.
There are a ton of free resources available online, but here are some that are continuously included on Top 10 lists.
Investing is 20% strategy, 80% psychological. When things go south, and asset prices begin to tumble, it is easy to reach for your parachute and jump off the plane.
This is the mistake most investors make. However, following the herd and exiting your position, stunts your progress and decreases your earning potential. You literally have to start all over again and have lost valuable time.
“Our favorite holding period is forever.” - Warren Buffett
Warren Buffett says the best time to sell a stock is never. He encourages investors to buy a stock and sit tight. Staying invested also allows you to zoom out and look at the bigger picture rather than being swayed by emotions in the market.
For clarity, if you had bought $1000 worth of Apple shares when it went public in 1980, your investment would be worth $1.2 million today.
Life is full of many unexpected turns. Though no one desires to be at the end of life’s short stick, it is an inevitable fact that we have to live with.
Nothing derails a well-thought-out financial plan more than unforeseen circumstances.
Emergencies come up with immediate financial pressure which, if not planned for, can set us back for several years.
For example, the loss of a job can roll back the progress we have made with our investments.
If we do not have an emergency fund to take care of us before we get back on our feet, sooner or later we would have to dip into our investments to sustain our living.
This scenario is worse if you don’t even have any investment at all. A lot of people have lost their livelihood because they could not properly navigate the consequences of an emergency.
Some have been forced to dip into their retirement funds to take care of pressing needs. As such, while chasing your financial and investment goals, it is proper to build a fund that would take care of emergencies.
“Three to six months’ worth of expenses is still the benchmark.” - Real Simple.
The older you get, the bigger your emergency fund should be as you take on more responsibilities and have less time to be productive. Some financial advisers advise building a stash that can handle your living expenses for 6 months.
Use every opportunity that presents itself to increase your investment contributions. Many people fall victim to lifestyle inflation.
The moment we earn more money, we increase our lifestyle and take up more expenses. This is why lottery winners go bankrupt after several years, because they do not have the character to manage their newly found riches.
An increase in income should be seen as an opportunity to save and invest more, not acquire more luxury goods to prop up our fragile egos.
One way to bypass lifestyle inflation is by having a fixed percentage for investment contributions. This way, any increase in income would automatically lead to an increase in contribution. Better yet, you can increase that percentage by some points anytime you get a raise.
A very simple example is this - if you get a 3% raise, put that back into your investments. You were able to meet your needs before you had that extra money, so you know it’s possible.
Two things are sure in life – death, and taxes.
While we can't do anything about the former, we can do something about the latter in terms of how it would affect our finances. The mistake most investors make is thinking about taxes after the fact and not before.
For example, how you sell appreciated investments can have a big impact on how much of your gains you get to keep.
There are things you can do to minimize tax payments legally. For example, you can decide to sell off an investment at a loss to offset some or all of your short-term gain.
You can also decide to hold on to an investment for at least a year and a day longer, at which point any gains would be taxed as a long-term capital gain.
“Beware of little expenses; a small leak will sink a great ship.” - Benjamin Franklin
The goal is for you to get rich, not enrich your portfolio manager. A lot of people tend to overlook investment costs that come in the form of management fees, commissions, and transaction costs.
These expenses though negligible at first, eat deep into our earnings in the long term.
As such, we should always keep an eye on investment costs. One way to reduce investment costs is by limiting the frequency of our trading. The fewer trades we execute, the lower the costs we pay in management fees.
A genius is not someone who knows everything, but someone who knows the limits of their knowledge.
In this age of information overload, where there are multiple sources of information than one can consume, and where everyone is a financial expert, it is easy to get swayed by emotions. Many people have invested in assets they do not understand just because everyone is doing it.
Investing in what you know has been evangelized by investment greats such as Warren Buffett and Peter Lynch. When you invest in an asset class you know, you can make more significant investments that would have more impactful returns.
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