You’re right, taking a contrarian approach can really pay off. Interestingly, Warren Buffett has become one of richest persons in the world and is arguably the best investor of all times. Yet, most investors take the opposite approach when they invest (short-term vs long-term, focusing on the market vs the companies, momentum vs value, herd mentality vs independent thinking, etc).

I definitely agree with what’s said in the post. Most people want to make money by investing, be it in the stock market, or real estate, or any other vehicle, but they don’t want to put in the work. That’s why they rely on tips from other people or from those so-called experts on financial networks, so that they don’t have to do their homework. Of course, we know how that turns out 99% of the time. You can’t make money by doing what everyone else is doing. If anything, people should use what they see on financial networks as signs of what NOT to do. Warren Buffett put it best: “Be fearful when others are greedy, and greedy when others are fearful”

Thanks for the clarification. We are in agreement.

You’re right, the average investor is constantly learning. However, it can be difficult at times as many of them can be influenced by what they hear on popular business shows on cable TV. These shows are more catered to speculators and traders than true investors (notice how often they run ads to encourage the average person to become an active trader).

That’s why the key to successful investing is independent thinking. Independent thinking combined with knowledge, partience and the right temperament is the winning formula.

Matt,

You make some great points. In my article re: investment results being in correlation with investment knowledge, what I meant by investment knowledge is not what they teach in Ivy League business schools (efficient market theory) or what institutional investors on Wall Street have.

Investment knowledge in my view is about individuals learning one step at a time how to be a true investor. It’s about buying a stock and becoming a part-owner of a business as opposed to trading stock certificates electronically.

I strongly believe that the individual investor can beat Wall Street but only if they play a different game. If they play Wall Street’s game of chasing short-term gains, it’s virtually impossible and requires a lot of luck. But if they are value investors and have a long-term outlook on the companies they invest in, they can be way ahead of the crowd, including the institutional investors like mutual fund managers, money managers, etc.

Wayne Gretzky once said that the secret to his success is that he doesn’t follow the puck, he anticipates where it’s going to go and he skates there.

Wall Street is constantly looking at where the market will be tomorrow, next week or next month. Successful investors like John Templeton, Peter Lynch, Warren Buffett, etc. are always looking at where the companies they invest in will be in 2, 3, 5 or 10 years.

Following a trading plan is more difficult that novice investors/traders think. Our cognitive biases i.e. psychological profile, make it so very difficult.
I learned that lesson the hard way.

I do disagree with one point, though. Investment returns are not directly correlated with investment knowledge, only indirectly correlated. The people that crashed their financial corporations in this economic collapse were Ivy League MBAs, and mutual fund managers with decades of investing experience got thrashed. Why? Greed and irrational expectations.

Instead, personal qualities (backed by a reasonable understanding of investing and math) are the most direct correlation to investment returns, with experience second. Deeply understanding the company you are investing in, having a long-term view, and having rock-solid investment patience trumps investing knowledge any day.

Sure, one does need knowledge, but give me a guy with 3 years of investment knowledge but a true long-term view and patience, and I’ll take him over a guy with 20 years of experience and a less rational personality. I truly believe in the power of individual investors.

Nice post.

Thanks for the compliment. Congrats on your website! At 24, you’re already way ahead of most people as you’re already on solid financial ground in terms of your maturity level and attitude.

You analogy in one of your articles about money being like soldiers working hard for you so that one day you won’t have to work is awesome.

Investing in index funds is also excellent as you’re avoiding the high-cost of actively managed funds and index funds beat over 80% of all mananed funds.

However, I’m hoping you will consider investing in companies directly one day. It all seems like a daunting task at first but it’s really not rocket science. If you’re willing to learn a bit at a time, you’d be amazed at how big your investment knowledge will grow to one day.

Buying an index fund is like buying an entire basket of stocks. As you learn more about investing, you can buy the very best stocks in that basket.

How fast you learn before you get to the “sweet spot” is up to you. It depends on your willingness to learn and the effort you want to put in. That’s why some people are surprised that I succeeded at a young age. But maturity does necessarily come with age; it comes as you grow inside and start living conciously.

I learned a great deal about real estate in my late 20s and learned a great deal about investing in my mid-30s. I was so passionate about learning to invest that I must have read over 50 books.

Perhaps in one of my next articles her at MDJ, I can explain to readers how Warren Buffett does it. His genius is that he uses an approach that is strikingly simple.

I can even show everyone how he does his calculations when he evaluates companies to come up with an intrinsic value (NPV P/E projections, discount cash flow, etc).

Of course, beyond the numbers there is a qualitative analysis that needs to be done as well but in my mind, if an investor cannot put a value on a company, it’s very hard to succeed in investing.

It’s like looking to buy a flat-screen TV but not understanding what is the fair value. How can you get a discount?

What said however, is that I USED to be my worst enemy. Then I got on track with index funds and have never looked back. I’m not smart enough to follow indivdual stocks so I just stick with the index funds and keep investing.

Great post Joe. I look forward to reading more. Thanks for your insight.

Here’s a really good starting point. There’s a great online classroom on Morningstar.com that can teach you all about investing in stocks, funds, bonds, etc.

http://news.morningstar.com/classroom2/home.asp?colId=397&CN=COM

Good luck!

Thanks for asking and giving me an opportunity to clarify. My definition of investment levels is more of a personal way for me to gauge my own progress without comparing myself to anyone.

The more I learned about investing, the more I realized what a beginner investor I used to be as I made virtually every single mistake possible. But what’s important is that I learned from my mstakes and still keep learning every day.

Whenever I can, I share with people my mistakes because although it’s good to learn from your own mistakes, it’s much better (and less painful) to learn from other people’s mistakes.

You don’t have to worry about what level you’re at; if you keep learning, eventually you will be rewarded.

I am not looking to knock your down but your credibility would agree many fold in my mind if you can show your track record and how it compares to an appropriate benchmark and what stocks you are recommending. Can you?

Not more not less. Anyhow, the common sense was wrapped up nicely. :)

Interesting the level metaphor as I use it, too.

Thanks for your kind words. You are absolutely right, it really helps for a person to have a strong foundation for money management before they start investing.

Someone who understands important concepts such as paying yourself first, living below your means, spending less than you earn, minimizing taxes paid, compounding effect, etc. is likely to make good investment decisions and not have a gambler’s mentality.

I’ve been going in and out of where to invest my money. I’ll definitely start with a company that I know of and that I use their services/products on a regular basis.