5 Investing Lessons To Live By

by Jon Dulin on July 21, 2014 · 12 comments

investing lessonsIn a previous issue of Kiplinger’s magazine, Kathy Kristof wrote a column that compares the lessons learned in the movie Moneyball with investing advice.

For those that haven’t seen the movie, Moneyball is a baseball movie about the Oakland Athletics General Manager Billy Beane. The A’s are a small market team, meaning they can’t spend a ton of money on high priced free agents. They have to find a way to win with a small payroll. Beane accomplishes this by looking at statistics of players and building his team around this. In many cases, he looks at statistics that other general managers overlook. It has proven successful as the A’s have been a competitive team most years since he took over. This is quite an accomplishment when there are so many other teams spending large amounts of money on the best players in the world.

In the magazine, Kristof takes the lessons from the movie and applies them to investing. In summary the investing lessons are:

  1. Don’t Believe Your Eyes
  2. Capitalize On Inefficiencies
  3. Don’t Watch The Game
  4. One Game Is Not A Season
  5. Experience Reduces Risk

I love all of these investing lessons. Here is my takeaway from each one.

5 Investing Lessons

Don’t Believe Your Eyes

For baseball, not believing your eyes simply means to dig deeper into analyzing a player. Just because he hits the ball the farthest doesn’t mean he is the best player. He may have artificial help or maybe he is playing against inferior opponents. The key is to not trust what you see, but to do the research to get to the real reasons why a certain player is successful.

When it comes to investing, not believing your eyes is the same as not allowing your emotions to get involved. Just because you see a “hot” stock rise day after day doesn’t mean it will continue to do so. There will come a point when investors will feel that the stock is overvalued and begin selling it.

The same can be said of a falling market. You see the market dropping every day and think the world is coming to an end. Don’t believe your eyes – stay rational. Over the short-term, the market will be choppy, but over the long-term, the market trend is positive.

Capitalize On Inefficiencies

There are many ways to capitalize on inefficiencies in baseball. If the starting pitcher you are going against doesn’t have great command, you could swing less, forcing the pitcher to throw strikes, otherwise he will walk a lot of batters. Likewise, maybe the right fielder doesn’t have a strong arm, so you know you can try to score on balls hit to him.

Great investors capitalize on inefficiencies as well. Corporations all have bad periods. When this happens, investors beat them down by selling the stock, forcing it down. When the price drops on a good company, this is the time to buy. Your strategy here would be to identity a handful of stocks and do the research to see if they are over-valued or under-valued. If they are over-valued, determine the price that would make them under-valued and wait until they hit that price. Then you buy.

Unfortunately, this is easier said than done. No one can time the market. Because of this, you should set up a recurring investment into the market to capitalize on the inefficiencies of the market. When you do this, you take advantage when prices drop without lifting a finger. I personally use Betterment. You can read my review of their service here.

Don’t Watch The Game

Beane rarely watches the game. This is because he doesn’t want to make a quick decision based on a play he saw and trade a player for the wrong reason.

Watching what the market does every day will drive you crazy. Up 100 points today. Down 50 tomorrow. Down 150 the next and then up 25 after that. You have to remember that you aren’t investing for the short term; you are investing for the long term.

When you watch the market every day, you are going to have your emotions enter into the picture and that spells doom for most of us. We don’t make smart decisions when we are emotional. Stop watching the market and concentrate on the long term.

One Game Is Not A Season

Beane knows that for the most part, one loss or one win isn’t going to make or break your season. A baseball season is 162 games in length that spans from April through September. If you are playing poorly in April, you have plenty of time to change course.

Similarly, one stock is not your entire portfolio. You can have some losers in your portfolio. As long as you are diversified, you can ride things out over the long term. Don’t make the mistake of getting caught up and focusing on your poor performing investments. You will always have some holdings that aren’t performing great.

For the market as a whole, one bad day isn’t the end of the world. Chances are you don’t need the money you have invested for 20 or more years. That is plenty of time to recover from a bad day in the market. Focus on continually investing for the long term and you will be OK.

Experience Reduces Risk

The draft in baseball is littered with failure. This is expected since so many players are drafted out of high school. At 18 years old, you never know who will make it and who won’t, who has the drive and who doesn’t. On the flipside are current professional players. You have statistics on these guys and know how they perform over the long term. They are less risky because of this.

The longer a corporation has been in business, the more you can see how it handles both the good and bad times. A newer, smaller company doesn’t have this history. The length of time in business reduces the investor’s risk. This is because you see that historically, the corporation can handle the bad times without going belly up. This is not to say they never will go belly up, but the chances of it are less likely than if they are a new corporation.

The same applies to you as an investor. The longer you invest, the more craziness you will see in the market. You will be able to rationalize more volatility the longer you are invested. In my short life, I’ve seen 2 bubbles burst, 3 wars and 3 recessions (that I can remember). Each time, the stock market has come roaring back. If I were a younger investor, I might be scared and run from the market. But the more experience I have, the smaller the chance I react and sell when times get tough. In other words, the less risky behavior I exhibit.

Final Thoughts

These are just a few investing lessons that I thought were great. If you can learn to follow them, you will put yourself in good financial shape for the long term and set yourself up for being a successful investor.

Readers, what are your thoughts on this list of investing lessons? Would you add any investing lessons to this list?

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{ 12 comments… read them below or add one }

Shannon-ReadyForZero November 7, 2012 at 6:06 pm

Love the analogy :). These are all very good points!
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moneysma November 7, 2012 at 9:31 pm

I loved them too! I found this after seeing the movie and thought they were dead-on.

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John @ Wise Dollar July 21, 2014 at 8:12 am

Great correlation between the two! #3 & #4 are huge ones. I saw this everyday in my old job. People just couldn’t seem to get out of their own way. I hate down days like everyone else, but your focus needs to be beyond what you can see in front of you.
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Jon Dulin July 23, 2014 at 12:19 pm

@John @ Wise Dollar: When the market is down, I just make it a point to not look at my portfolio. In fact, I only look on days when the market is up big. I might be down overall with some holdings, but the green positive increases over the day really help to keep my emotions in check.

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EL @ Moneywatch101 July 21, 2014 at 10:13 am

All great lessons and the buy and hold lesson is a vital one to build wealth. Another investing tip is to be mindful of the fees in whatever investing platform you use. I see people investing monthly when they could easily build up the cash and invest it quarterly for almost the same results except way cheaper.

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Fred @ Stockerblog July 21, 2014 at 3:58 pm

@EL @ Moneywatch101: I’m not sure how investing quarterly instead of monthly can be better. With compounding, investors are far better off investing monthly. As an example, if you invest $1,000 per month, with a 9% return (rough historical average for the stock market), at the end of 20 years, you would have $667,886.87. However, if you invest $3,000 quarterly instead over the same period, you would only end up with $657,352.71, which is ten grand less.
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Jon Dulin July 23, 2014 at 12:20 pm

Paying attention to fees is huge! It’s probably the most overlooked aspect of investing.

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Josh @ CNA Finance July 21, 2014 at 12:17 pm

I love these lessons, great way to tie it to baseball and the movie. I think the most important one to remember is that one game doesn’t make a season. Thanks for sharing!
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Jon Dulin July 23, 2014 at 12:21 pm

Yeah, I like that one too. We are so focused on the short-term, it’s easy to overlook the long-term potential that investing provides.

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MMD July 21, 2014 at 12:39 pm

I can’t believe I still have yet to see Moneyball. I can totally agree with “Don’t Watch the Game”. When you sit there and watch every little move, you’ll drive yourself insane. It’s simply better to look at the performance overall and then make your decisions from there.
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Jon Dulin July 23, 2014 at 12:22 pm

You’ll try to start predicting what will happen next and you’ll be wrong. Then when you are right, you’ll think you are on to something only to realize that you can’t predict where the market will go next.

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Eugene@ ShareInvestorMalaysia July 24, 2014 at 10:35 am

I like the 1st lesson: Don’t Believe Your Eyes ! LOL
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