Buffett can also be hard on himself. Sometimes, too hard.

In 1996, Buffett once again became a shareholder of Disney when it merged with Cap Cities/ABC, of which Berkshire was a major shareholder.  Buffett recalled how he had first become interested in Disney 30 years earlier.  Then,

"....its market valuation was less than $90 million, even though the company had earned around $21 million pre-tax in 1965 and was sitting with more cash than debt.  At Disneyland, the $17 million Pirates of the Caribbean ride would soon open.  Imagine my excitement - a company selling at only five times rides!"

"Duly impressed, Buffett Partnership Ltd. bought a significant amount of Disney stock at a split-adjusted price of 31 cents per share.  That decision may appear brilliant, given that the stock now sells for $66.  But your Chairman was up to the task of nullifying it:  In 1967 I sold out at 48 cents per share."

With 20/20 hindsight, it's easy to see that selling at 48 cents per share was a major blunder.  But in criticising himself for doing so, Buffett overlooks the fact that in 1967 he was still largely following Graham's investment model.  In that model the rule is to sell a stock once it reaches intrinsic value.

Nevertheless, he has clearly taken to heart Philip Fisher's observation that studying "mistakes can be more rewarding than reviewing past successes."

Buffett shows it is better to be overly critical than forgiving of your own mistakes.  As Buffett's partner Charlie Munger puts it:

"It is really useful to be reminded of your errors.  I think we're pretty good at that.  We do kind of mentally rub our own noses in our own mistakes.  And that is a very good mental habit."

Buffett's $2 Billion Mistake

Uniquely, Buffett also considers what could have been when he analyzes his mistakes.

In 1988 he wanted to buy 30 million (split-adjusted) shares in Federal National Mortgage Association (Fannie Mae), which would have cost around $350 million.

"After we bought about 7 million shares, the price began to climb.  In frustration, I stopped buying ...  In an even sillier move, I surrendered to my distaste for holding small positions and sold the 7 million shares we owned."

In October 1993, he told Forbes that "he left $2 billion on the table by selling Fannie Mae too early.  He bought too little and sold too early.  "It was easy to analyze.  It was within my circle of competence.  And for one reason or another, I quit.  I wish I could give you a good answer."

This was a mistake that, he wrote, "thankfully, I did not repeat when Coca-Cola stock rose similarly during our purchase program which began later the same year.

Learn from Your Mistakes

Always treats mistakes as learning experiences.

We're programmed to learn from our mistakes.  But what we learn depends on our reaction.  

A child goes to school, and what does he learn about mistakes there?  In too many schools, he is punished for making mistakes.  So he learns that making mistakes is WRONG; and that if you make mistakes you're a FAILURE.

Having graduated with this carefully ingrained attitude, what's his reaction when, as is inevitable in the real world, he makes a mistake?  Denial and evasion.  Blame his investment advisor for recommending the stock, or the market for going down.  Or justify his action:  "I followed the rules - it wasn't my fault!" just like the kid who screams "You made me do it."  The last thing he's going to do with that kind of education is to be dispassionate about his mistake and learn from it.  So, just as inevitably, he'll do it again.

When a master investor makes a mistake, his reaction is very different.  First, of course, he accepts his mistake and takes immediate action to neutralize its effect.  He can do this because he takes complete responsibility for his actions - and their consequences.

Buffett has no emotional hang-up about admitting his mistakes.  He makes it his policy to be frank and open about them.  According to Buffett, "The CEO who misleads others in public may eventually mislead himself in private."  To Buffett, admitting your mistakes is essential if you are to be honest with yourself.

There is no shame in being wrong, only in falling to correct our mistakes.  Having cleared the decks by getting rid of the offending investment, a master investor is free to analyze what went wrong.  And he always analyzes every mistake.  
-  First, he doesn't want to repeat it, so he has to know what went wrong and why.
-  Second, he knows that by making fewer errors he will strengthen his system and improve his performance.
-  Third, he knows that reality is the best teacher, and mistakes are its most rewarding lessons.




If you wanted to teach someone how to ride a bike, would you give him a book to read?  Or would you give him a few pointers, sit him on a bike, give him a gentle shove and let him keep falling off until he figures it out for himself?

"Can you really explain to a fish what it's like to walk on land?"  Buffett asks, "One day on land is worth a thousand years of talking about it."

Are You Making These Investing Mistakes?

by MMARQUIT ·

One of the ways that you can build wealth, and live a little more abundantly is to invest. Investing can provide a way for you to put your money to work on your behalf. While there are risks involved in investing, and the possibility of loss, you can reduce some of that chance of loss by avoiding some of the more common investing mistakes.

As you consider investing, and how to build a portfolio that works for your situation, here are some common mistakes to avoid:

1.  Panicking with the Crowd

It’s easy to get scared and panic — especially when everyone else is doing it. However, you need to be careful about when you sell investments. While there are some very good reasons to sell a stock, it’s rarely a good idea to sell a stock just because everyone is in panic mode.

Instead, take a step back and look at the big picture. Are assets losing ground because the whole market is tanking? If so, you might not want to pull the trigger too quickly. Instead, consider the fundamentals. If the fundamentals are still solid, there is a good chance that your assets will recover in time.

2.  Trading Too Often

This can be tied with panicking, but it can also be its own problem. Too many of us get caught up in to day to day movements, and think that we need to trade a lot. While there are day traders who manage to make good money on regular market movements, it’s important to realize that these traders are dedicated to what they do.

Most of us regular folks are better off trading at wider intervals, or employing a dollar cost averaging strategy. Trading too often can cost you in terms of transaction fees, and there is a bigger chance that you will lose out.

3.  Lack of Diversity

If you want to reduce the overall risk of your portfolio, you need to remember to diversify to some degree. You need to make sure that your investments are diversified in terms of asset class, as well as across different sectors and industries. It also doesn’t hurt to diversify geographically and include investments from other countries. Avoid investing heavily in your company’s stock.

It’s fairly easy to start investing, and to diversify. There are index funds and ETFs that allow you to diversify easily, while at the same time helping you avoid some of the bigger risks that can come with  investing.

4.  Failure to Understand What You're Investing In

One of the reasons it’s good to start with stocks and bonds, and investments that are based on them (like index funds and ETFs), is because they are fairly easy to understand. You shouldn’t invest in things that you don’t understand. Take a few minutes to learn how different asset classes are traded, and how different investments work. It is also worth to learn what factors influence different investments. Get a handle on how different investments work, and you will be far more likely to find success and avoid some of the pitfalls that bring down investors.

http://couponshoebox.com/tips/are-you-making-these-investing-mistakes/?utm_campaign=Feed%3A%20CouponShoeboxTips%20%28Coupon%20Shoebox%20Tips%29&utm_medium=feed&utm_source=feedburner

Avoid Common Investment Mistakes. Keep your emotions in check.

A recent report from Barclays Wealth identified four of the most common mistakes people make:

Focusing on single investments rather than the big picture.Consequence: not being appropriately diversified

Concentrating on a short-term time horizon. Consequence: mistiming the market

Taking more risks when comfortable and less risks when not.Consequence: buying high, selling low

Taking actions in hopes of gaining control. Consequence: high fees from trading too frequently

http://money.cnn.com/2012/06/25/investing/investment-mistakes-net-worth.moneymag/index.htm

The 10 Mistakes Investors Most Commonly Make

All investors make mistakes. Otherwise, we'd all be millionaires. The trick is figuring out what our investing mistakes are -- and then trying to avoid them.

Meir Statman, one of the nation's leading experts in behavioral finance (the study of why people do irrational things with their money), has written a new book on the topic. In What Investors Really Want, published in October by McGraw-Hill, Statman goes a long way toward helping investors understand that many of their mistakes are caused by their own deep-seated emotions rather than, say, a company's unexpectedly poor earnings. 

In an interview with DailyFinance, Statman, a professor of finance at Santa Clara University in California, shared his top 10 errors that trip up average investors:

1. Hindsight error. "One of the most pernicious mistakes," Statman says. Because you can see the past clearly, you think you have a similar ability to tell the future. Hindsight error is common at the moment, Statman says, because many people are convinced they saw the crash coming in 2007. In reality, they may have thought a crash was possible, but they also thought the market might continue to zoom upward. Now, investors are convinced they actually saw the problem in 2007 but just didn't act on it. So, they believe wrongly that they can act correctly today. They think they know to sell at the precise moment the market is high and buy when the market is low. Based on their hindsight of 2007, portfolio diversification doesn't protect you from losses. But market timing rarely works, Statman says.

2. Unrealistic optimism. This is loosely related to overconfidence. Psychological studies have shown that when you ask people if they think they have the ability to pick stocks that will have above-average returns, men tend to say yes more often than women. "It's not because men are so smart. It's because men are unrealistically optimistic about their abilities," Statman says. This quality is great for job interviews, where you need to stand out from a crowd, but lousy for investing. "When you are unreasonably optimistic in the stock market, you are just readying yourself for an accident," he says.

3. Extrapolation errors. People expect that trends that existed in the recent past will continue in the future. For example, the fact that gold has gone up for the last 10 years has led many to believe it will always go up. But a study of a longer period -- going back to 1971 when President Richard Nixon ended the gold standard -- shows that gold hit a high of $850 an ounce in 1980 but was selling for $345 as long as 10 years later.

4. Framing errors. Often, Statman says, investing is like a game of tennis. People tend to see themselves hitting a ball against a wall, which seems easy. But that's the wrong frame. Investing is really like playing against another player -- when the other player is Warren Buffett or Goldman Sachs. Investors make framing errors when they see a CEO on TV talking up his stock. If it sounds good and you buy that stock, that's a framing error. Instead, you should be asking yourself: "Who else is watching this program, and what do I know that is uniquely mine?" "The answer is nothing," Statman says.

5. Availability errors. This refers to what information is available in your memory. Investors are often lulled into this error by investment companies. When you see an advertisement for a fund, it's almost invariably for one that has a four- or five-star rating from Morningstar. That way, the one- and two-star funds, with lackluster results, aren't available in your memory. "You say to yourself that there's a 90% chance I will be a winner," Statman says. Instead, look at results of entire fund families -- including the losers, not just the winning funds for a particular period, he says.

6. Confirmation errors. Investors tend to look for information that confirms their hypothesis, but they disregard evidence that contradicts it. Gold bugs, for example, constantly remind us that gold is a good hedge against inflation and a declining dollar. But when confronted with the evidence that gold actually fell price for an entire decade, they dismiss that as a different era because Ronald Reagan changed the rules of the investing game, and that problem won't be repeated.

7. Illusion of control. This is a sense investors have that they can make the market go up or down. It's like gamblers blowing on their dice before rolling. "These investors think they're riding the tiger, when in fact they're holding the tiger by the tail," Statman says. If you think you have a trick that can get the market to go your way, you better think twice: This is the illusion of control. "When you realize the market is actually a wild beast that can devour you, you try to put it in a cage," he says. A much safer approach.

8. Anger. This is an emotion we all know: It leads to things like road rage. In investing, you try to get even with the market. You do such things as double down or even sell all your stocks impulsively. "If you feel angry, it's better to wait 10 days before buying or selling, or you'll regret it later on," Statman says,

9. Fear. The other side of exuberance. When you're afraid, everything looks like a threat, and when you're exuberant, everything looks like an opportunity. Lots of investors are still afraid because of the market crash two years ago. They're sitting on the sidelines in cash earning no return or investing in things like Treasury bills, which aren't much of a bargain. "Risk and return go together," Statman says. "So, if you think the market is risky today, then you should also think the market has a good potential for high returns."

10. Affinity of groups. Also known as herding. You hear from your pediatrician that he's buying gold, so you think you should, too. But what do these people really know? What is the analysis based on? Statman notes that some herds are worth joining and some aren't. Many investors follow Warren Buffett's investment decisions and buy similar stocks. Since Buffett is usually a winner, perhaps that's a herd worth joining. But buying Internet stocks in 1999 or houses in 2005 based on what everyone else was doing was a horrible mistake.

Statman makes no grand conclusions in his book, but he does point out repeatedly that the average investor can rarely beat the market. Therefore, he recommends small investors put their money in index funds that provide average, if not spectacular returns -- and not catastrophic losses

"But if you like the pizazz of investing," he says, you might take a shot on individual stocks. Just be careful. 


By Charles Wallace

Posted 6:00AM 12/05/10
http://www.dailyfinance.com/2010/12/05/10-mistakes-investors-make/

The 100 Things I've Learned in Investing

By Anand Chokkavelu, CFA | More Articles 
June 29, 2012 | Comments (7)

As you'll see in No. 47 on my list, it's very important to step back and gain perspective. In an attempt to stop making the same mistakes over and over, here's my attempt to codify the 100 lessons I've learned in my investing career so far.

1. Most of this list is dedicated to insight on beating the market, but know this: It's darn hard to beat the market. Ninety-nine percent of people are best served steadily buying and holding low-cost index funds at the core of their portfolios -- and I may be understating that 99% figure.

2. Looking for a one-stop index-fund core? For a very reasonable 0.2% in fees a year,Vanguard target date retirement funds will automatically diversify and balance the stock and bond portions of your portfolio -- just pick your retirement date. The Vanguard family of index funds is what I recommend to just about everyone who asks.

3. Being contrarian doesn't just mean doing the opposite. The "contrarian" street-crosser gets run over by a truck.

4. In any financial matter, find out what the other person's incentives are. Discount accordingly.

5. Even a gut investment call should have some numbers to back it up.

6. Mistakes made in your 20s are better than mistakes in your 50s. Mistakes involving $100 are better than mistakes involving $100,000.

7. My all-time favorite Warren Buffett quote: "We like things that you don't have to carry out to three decimal places. If you have to carry them out to three decimal places, they're not good ideas."

8. Never buy stocks on margin, no matter how "can't miss" the opportunity is. That blend of leverage and arrogance is exactly what gets Wall Street in trouble. The difference is that we're not too big to fail.

9. Don't waste time mastering things that simply don't work (see lessons 10 through 12).

10. Example No. 1: day trading. Like playing roulette, you'll have some victories, and you may be able to fool yourself into thinking you're skillful. The house just hopes you keep playing.

11. Example No. 2: technical analysis. The only chart pattern worth noting is the jagged, but likely downward-sloping line of your savings if you follow this technique.

12. Example No. 3: leveraged ETFs. Bastardized ETFs like the Direxion Daily Financial Bull 3X (NYSE: FAS  ) are another great way to lose money. Even if you guess right on direction, the mathematics of the daily reckoning mean these instruments are long-term losers.

13. Stock stories about growth potential (e.g., tech stocks) are sexier than stock stories about track record (e.g., consumer goods stocks). Only the latter are verifiable today, though.

14. Having a strong opinion (let alone acting on it) is overrated. Knowing 20 stocks cold beats being able to challenge Jim Cramer in the lightning round.

15. Albert Einstein allegedly declared compound interest "the most powerful force in the universe." High-interest credit card debt aims that force at your wallet. To get compound interest pointed in the right direction, save (and invest) early and often!

16. A casino makes us use chips in lieu of cash, partially because we forget that the chips represent real money. Stocks may act in screwy ways and invite us to play games, but as investors we can't lose sight of the fact that stocks represent real companies. As Peter Lynch puts it using a different gambling analogy, "Although it's easy to forget sometimes, a share is not a lottery ticket ... it's part-ownership of a business."

17. When talking to other investors, have your BS detector handy. When you hear their "big fish" stories, know that their brilliant track records likely have more to do with selective memory and poor scorekeeping than skill.

18. A great Buffett reason not to fudge our taxes: "We'll never risk what we have for what we don't have and don't need."

19. Those who know what they're doing make complexity seem simple. Folks who don't (or are trying to sell you something) make simplicity complex.

20. A clear sign of the latter: jargon.

21. Asset allocation is more important than stock picking. A silly example: Say you're holding a race among five horses and five human beings. Many investors spend their time trying to rank the five human beings, when they're better off just betting on the five horses.

22. If you don't understand it, don't buy it until you do.

23. Sigh -- hard work is required to beat the market. Per Peter Lynch: "The person that turns over the most rocks wins the game. And that's always been my philosophy."

24. On the plus side, the results of hard work can be breathtaking. In his book Outliers, Malcolm Gladwell gives example after example of people we term "geniuses" who are really hyper-dedicated people who work at their craft relentlessly. Among the examples he uses are Bill Gates and the Beatles. He argues that both got to where they got because of the opportunity (and inclination) to hone their skills for 10,000 hours. That's the equivalent of five full years of work -- or 1,000 weeks of practicing 10 hours a week.

Gates had access to an ultra-high-end computer terminal because his exclusive middle school started a computer club. In high school, his access went up a notch as he gained access to the computers at the University of Washington. He talks of getting 20 to 30 hours of programming time in each weekend. On weeknights, he'd slip out of his house to take advantage of the open time-sharing slots from 3 a.m. to 6 a.m. And the Beatles were just as obsessed. By the time they broke out on the Ed Sullivan show in 1964, the Beatles had played an estimated 1,200 shows, some lasting eight hours!

25. None of the time spent checking and rechecking Yahoo! Finance portfolios counts toward those 10,000 hours. And here's the real kick in the groin: 10,000 hours is a prerequisite for mastery -- not a guarantee.

26. Common sense is as uncommon in investing as it is in real life.

27. One of my favorite lessons from the poker table: Action is overrated. The best players (and investors) are constantly weighing the opportunities, but rarely are they moved to act.

28. A similar sentiment by Vanguard founder Jack Bogle: "Time is your friend; impulse is your enemy."

29. Selling is overrated. Reason No. 1: We often sell potential multibagger winners that would more than make up for our losers. The greater the quality of the business, the greater the danger of selling too early.

30. Selling is overrated. Reason No. 2: Outside of retirement accounts, selling kicks in voluntary taxes.

31. Selling is overrated. Reason No. 3: Fees.

32. In the hands of a good storyteller, almost every stock looks like a winner. Assume you're not hearing the whole story.

33. A question to ask before buying a stock: "What's my competitive advantage on this stock? Do I really know something the market doesn't?" The more specific the advantage, the better.

34. Sweat the big stuff.

35. Most of us are too enamored with "so you're saying there's a chance" opportunities. A Hail Mary belongs on the gridiron or in the pew -- not in the brokerage account.

36. A great rule of thumb for buying a house (the biggest single investment most of us will ever make), from fellow Fool Buck Hartzell back in 2005: "If a home is selling for 150 times the monthly rent (or less), it's generally a good deal. If it's selling for more than 200 times the monthly rent of a comparable property, you're better off renting."

37. One of the toughest facts about investing is that a proper track record takes decades. Charlatans can do quite well for years and years. This is potentially dangerous for our assessment of ourselves and of others. Focusing on process, rather than results, helps.

38. Price matters. A great company can be a great big loss for you if you pay too much.

39. When applicable, use the tax system to your advantage. Retirement accounts like 401(k)s and IRAs can be huge boons.

40. It is twice as easy to sound intelligent being pessimistic about the future as it is being optimistic.

41. Greater risk theoretically yields greater reward, but a stupid investment is just a stupid investment.

42. Sir John Templeton's quote: "'This time it's different' are the four most expensive words in the investing language." The details change, but the basic storylines remain the same.

43. Investing shouldn't be improv. Take the time to write a thoughtful script.

44. A key Buffett quote to understand: "Time is the friend of the wonderful company, the enemy of the mediocre." Why is this so? Partially because "you only find out who is swimming naked when the tide goes out." I really struggle to abide by this advice. I am often the Statue of Liberty when it comes to investing in inferior companies on the cheap: "Give me your tired, your poor, your huddled masses," etc.

45. Options promise big gains in short time periods. The problem? About three out of every four expire worthless. Contrast that with a stock, which doesn't expire.

46. Sorry, market timers: Take it from Peter Lynch, who said, "If you spend more than 13 minutes analyzing economic and market forecasts, you've wasted 10 minutes." Or fellow investing great Ralph Wanger: "If you believe you or anyone else has a system that can predict the future of the stock market, the joke is on you." Or the godfather of value investing, Benjamin Graham: "It is absurd to think that the general public can ever make money out of market forecasts."

47. Keep a journal (or spreadsheet) of your stock picks, complete with your rationale for each move. Then look back on it to see if you were right. We may think we're good dressers, but all it takes is a high-school yearbook to prove otherwise.

48. Step aside, high blood pressure: Inflation is the silent killer.

49. Diversification doesn't entail making a whole bunch of dangerous investments and hoping they cancel out. That's the financial equivalent of stabbing your leg to cure your flu.

50. 13 Steps to Investing Foolishly is excellent.

51. Index ETFs may be the most wildly misused products in the stock market. They are excellent tools for ultra-low-cost buy-and-hold diversification, but many use them to day-trade the market (and sectors thereof).

52. Somewhere around 80% of actively managed mutual funds (as opposed to broad index funds) don't beat the market.

53. The more we learn about investing, the more we want to start doing exotic things (naked straddle options, anyone?) and buying stock in obscure companies no one has heard of. Maybe it's boredom, maybe arrogance, or maybe the desire to impress people at parties. Or perhaps it's seeking the glory of being right when few saw it coming. I'm guilty as charged on all counts. When I'm at risk of going off the deep end, I try to remember that stock picking isn't diving. As Buffett has noted, there are no extra points (or returns) for degree of difficulty.

54. This Einstein maxim is spot-on for stock analysis: "Everything should be made as simple as possible, but no simpler." Both clauses are crucial.

55. Just because a company or industry is set to change the world doesn't mean it's a great investment. Beyond looking at valuation, there tends to be a Wild West of players until a few winners emerge. In fact, market beater Ralph Wanger says, "Since the Industrial Revolution began, going downstream -- investing in businesses that will benefit from new technology rather than investing in the technology companies themselves -- has often been the smarter strategy."

56. Jumping from one flavor of the day to the next isn't continuous learning.

57. Long-tail events (a.k.a. black swans) are highly underrated. Nassim Nicholas Taleb explains it best in his book, Fooled by Randomness.

58. Every time I start getting cocky (which is often), I am unceremoniously reminded there are no sure-thing stock picks. As master investor T. Rowe Price noted: "No one can see ahead three years, let alone five or ten. Competition, new inventions -- all kinds of things -- can change the situation in twelve months."

59. I personally get way too excited when a stock hits its 52-week lows or falls 50%. Many sins are washed away in my mind when I see a bargain, but price movement by itself is not a sufficient reason to buy (or sell). Falling knives can be death -- especially when they're rusty and gross.

60. A related point: No one consistently times the bottom or top of a stock's price (let alone the market of stocks!).

61. Don't let the false modesty of investing greats fool you into false confidence.

62. My three strikes against gold. Strike one: Its value can't be estimated with basic math (since it just sits around producing nothing). Strike two: Wharton professor Jeremy Siegel showed that going back to the 1800s, the return on gold has barely kept up with inflation and is left in the dust by stocks and bonds. Strike three: Gold as a doomsday investment doesn't make much sense. If the apocalypse (financial or otherwise) actually comes, you're probably screwed regardless.

63. Discount cash on a company's balance sheet. Managements are brilliant at squandering it.

64. Done properly, value investing -- e.g., focusing on low-P/E, low-P/B, low-TEV/EBITDA stocks for ideas -- has proven to work quite well. But as successful growth-investor Bill O'Neil warns, "What seems too high and risky to the majority generally goes higher, and what seems low and cheap generally goes lower."

65. You may be too smart to be rich.

66. Know thyself. Know your weaknesses and strengths. Here's a specific example from Joel Greenblatt: "For most people, stocks should represent a portion of their investment portfolio because I still believe that over the long term they will provide superior returns relative to most alternative investments. However, whether that portion of an investment portfolio devoted to stock investments should be 40% of an investor's portfolio or 80% is a very individual decision. How much are you willing (or able) to lose before you panic out? There's no sense investing such a large portion of your assets in a long-term strategy if you can't take the pain when your chosen strategy doesn't work out for a period of years."

67. For some help on getting to know yourself, study the common mistakes behavior finance experts have uncovered.

68. Folks say that "success has many fathers, while failure is an orphan." Combine that with our willingness to overvalue streaks owing to one event, and I start to wonder: Do we overvalue managers that leave a successful organization to turn around a woeful organization?

69. If you just heard of the company yesterday, don't buy its stock today.

70. The Internet and better regulations have largely eliminated data advantages. The problem now is isolating which data is actually meaningful. Better results stem from increasing the signal-to-noise ratio.

71. Even if you rely on advice from others, heed the words of bond fund legend Bill Gross: "Finding the best person or the best organization to invest your money is one of the most important financial decisions you'll ever make." As with stocks, familiarity alone isn't protection. Check out our seven-part special report on financial advisors.

72. Stuff that leads to suckerdom: greed, laziness, unearned trust, ignorance, and shortcuts. When in doubt financially, do the opposite of your favorite athlete.

73. Make sure to get the right odds. There should be a vast difference between what we pay for a has-been or never-was and what we pay for a potential superstar company. As George Soros puts it, "It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong."

74. Initial valuation matters, but generally, over longer periods of time (decades, not years), stocks have returned more than bonds. The more decades you have left, the more of your portfolio should be in stocks to stave off inflation.

75. In theory, well-timed share buybacks are better than dividends. They save on taxes and allow the people who know the company best to buy up shares when the market acts crazy. In practice, I'll take dividends. (A tangential bonus fact: Dividend stocks have historically beaten non-dividend stocks).

76. Some of the most misinterpreted words in investing: Peter Lynch's "Buy what you know." It's more like "Research what you know and then consider buying."

77. Don't be an Enron baby. Overweighting your investments in the company you work for is a double-down bet we don't need to be taking. On the other hand, your company's 401(k) match is free money.

78. There are many paths to the top of the investing mountain, but some are more fraught with peril -- and there are very few trailblazers.

79. Numbers frequently lie -- especially in isolation. Say you spot a P/E ratio of eight. Sounds darn cheap! But is that industry's profitability rapidly deteriorating? Was there a one-time item that temporarily juiced the bottom line? Is an upstart competitor hungrily eyeing its lunch? Are new regulations threatening its livelihood? Is it a cyclical industry? Is it in a country that has a really poor reputation for accounting fraud or government interference? You get the idea.

80. Mergers and acquisitions are overrated. Somewhere between 50% and 85% of mergers fail to boost value. The frequency of achieving promised "synergies" should be filed somewhere between unicorns and no-hitters.

81. It's hard to be an independent thinker when the pressures to conform are daily and good investment theses can look ugly for years before paying off. Ben Graham said it this way: "Even the intelligent investor is likely to need considerable willpower to keep from following the crowd." Famed investor John Templeton talked of his defense against crowd-following: "When asked about living and working in the Bahamas during his management of the Templeton Group, Templeton replied, 'I've found my results for investment clients were far better here than when I had my office in 30 Rockefeller Plaza. When you're in Manhattan, it's much more difficult to go opposite the crowd.'" The digital equivalent today is turning off real-time news and Internet feeds and reading more thoughtful analysis.

82. The best book I've ever read on the basics of stock picking: Joel Greenblatt's The Little Book That Still Beats the Market. It's literally written so that a small child can understand it. It also does a great job of explaining why return on capital is a measure to pay attention to.

83. It's not the rewards you don't understand that'll burn you, but the risks you don't understand.

84. The guy who invented the P/E ratio (James Slater) on small caps: "Most leading brokers cannot spare the time and money to research smaller stocks. You are therefore more likely to find a bargain in this relatively under-exploited area of the stock market." Of course, because there is less interest and less Wall Street coverage, doing your own due diligence is that much more important. The same holds for other underfollowed areas of the market, like special situations.

85. If you can learn quickly from your own mistakes, you're ahead of the game. If you can learn quickly from others' mistakes, you've won the game.

86. Jim Sinegal of Costco on why you can't pay too much attention to Wall Street: "You have to recognize -- and I don't mean this in an acrimonious sense -- that the people in that business are trying to make money between now and next Thursday. We're trying to build a company that's going to be here 50 and 60 years from now."

87. If it seems too good to be true...

88. Buffett's concept of the "circle of competence" is important: "There are all kinds of businesses that I don't understand, but that doesn't cause me to stay up at night. It just means I go on to the next one, and that's what the individual investor should do." Also consider Steve Jobs' quote: "Focus is about saying no." For a great book on saying no, read Seth Godin's tiny book The Dip.

89. The stock moves I've made based solely on the advice of others -- e.g., "He's a good energy analyst and he loves this oil stock," or "This famous stock picker is buying X!" -- have generally been disasters.

90. If you can read a dissenting opinion without resorting to an ad hominem attack, you're at an advantage.

91. Downer alert: We like control, but we can't control everything. Life and luck can (and will) trump investment plans. You can do everything right and still die penniless. All we can do is give ourselves a better chance to succeed.

92. That said, if you're reading this article, there's a good chance the genetic lottery has smiled favorably upon you.

93. Here's something to think about the next time you get antsy to buy immediately into the latest must-act-now opportunity (e.g., a hot IPO). The year 1986 marked Coca-Cola's 100-year anniversary. If you had bought shares to commemorate the occasion, you'd be sitting on something like 15 to 20 times your initial investment. Time waits for no man -- but stocks will.

94. How can we get rich? Per Ohio State economics professor Jay Zagorsky: "Staying married, not getting divorced, [and] thinking about savings." To those, I would add having the proper insurance coverage.

95. There are more than 5,000 stocks on major U.S. exchanges. A great stock picker finds one great stock idea a year. Don't let the ones that got away frazzle you into buying the ones you should have ignored.

96. The Pink Sheets and over-the-counter markets are where sketchy penny stocks live. Do yourself a favor and stick to stocks on major U.S. exchanges -- preferably ones with market caps of more than $200 million. And never, ever heed penny stock spam emails.

97. When I learned to drive, I nervously focused on each upcoming parked car. My father told me to focus down the road and the parked cars would take care of themselves. Perhaps my first lesson in investing.

98. Do not buy low and sell high; rather, buy low and don't sell often.

99. For the penultimate lesson, let's turn once more to Warren Buffett, who briefly said in his 2004 shareholder letter what took me 98 bullet points to say:

Over the 35 years, American business has delivered terrific results. It should therefore have been easy for investors to earn juicy returns: All they had to do was piggyback Corporate America in a diversified, low-expense way. An index fund that they never touched would have done the job. Instead many investors have had experiences ranging from mediocre to disastrous.

There have been three primary causes: first, high costs, usually because investors traded excessively or spent far too much on investment management; second, portfolio decisions based on tips and fads rather than on thoughtful, quantified evaluation of businesses; and third, a start-and-stop approach to the market marked by untimely entries (after an advance has been long under way) and exits (after periods of stagnation or decline). Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.

100.  Despite my best efforts, I will repeatedly and thoroughly fail to heed these lessons. Let's hope you're better at No. 85 than I am.

http://www.fool.com/investing/general/2012/06/29/the-100-things-ive-learned-in-investing.aspx#.T-4jVReO2rs

BETTER BY MISTAKE: The Unexpected Benefits of Being Wrong

Seven Most Deadly Sins of Investing

Greed
Motivation and Destruction: Greed it's a interesting one. Where it's hard to know how greedy to go, or how much should I really want. You've got something that you want to make into something more. No problem with that. But too much greed will ensure your failure. Stop chasing that fast cash, this one is a ringer, this one is it thoughts and investing. Make sure you are not getting greedy, but still investing wisely and not out of greed, motivation. Generations of stock market losers have proved that there's no such thing as a fast buck. But there are bucks to be made for those who can overcome their urges and avoid this sin, and the rest of the seven sins.

Gluttony, Envy, and Lust
When lusting about anything it's very unhealthy. Lust can leave you in the alley street with literally nothing. Especially in our commercial culture, fiscal gluttony is easily sparked by its sister sins, Envy and Lust. If you need to have the shiniest car on the block or the biggest granite countertops in all of Poshbottome Pointe, your absolute investment returns are sure to suffer.

Take this example, say Average Joe could invest and have a annual returns of 15% a year. (That would make you a very good investor -- so you shouldn't count on those kinds of returns.) For the example Average Joe is dreaming big. It still won't make you wealthy if you're earning that 15% on nothing. Remember: Buffett didn't get rich just by making great investments. He got rich by not wasting money that could be added to the kitty. Don't believe me? Do the math. No, wait, let us do it for you.

If you start with $1,000 and earn that 15% a year in a tax-free account, your money will be worth $87,500 after 30 years. Not too shabby. By contrast, if you can skip the gas station stops in the morning and bag a lunch a couple of times, you can scrape together a lousy $1,000 a year to add to your nest egg. The final result? $625,000. Drive an old clunker and ignore all those tempting incentive offers from keeping up with the jones, and then save the $500 a month you would have spent on coffee and cars, and you'll be looking at $3.3 million -- though perhaps not if you invest in GM, while it battles slowing sales and an expected earnings decline.

Yes, Averag Joe is now looking more like Donald Trump (okay we will not get carried away). But do the same at a more reasonable 8% rate of return, and you'll still end up with $730,000. The point is this: Unless you're already sitting on a pretty big pile of dough, your stuff-envy and financial gluttony will be a much bigger factor in your future financial independence than any magic you can conjure for your portfolio's performance. Control your urges accordingly.

Anger
If you don't know Anger around the stock market, then you have been to yahoo's message board before have you? Seriously, that at times can be the anger in and of itself just reading through those message boards or other stock forums. Anger is a natural reaction to adversity, but it's one that rational investors need to overcome if they hope to have consistent success.


Investing is an inherently risky activity that demands a hard look at the facts, good and bad. But a huge number of stock buyers view it like some kind of Sunday-afternoon competition. It's like a intense sports match, cheering on there team, but giving heck to the others! And the anger makes them blind to the negatives. Woe unto the drunk fan who points out the lack of steady revenues and complete absence of profits at a company like Lakers. Plenty of angry members of the Stinger crowd try to blame the others for any downtick, even though they can see for themselves the firm has minute sales; no profits; mystifying, short-lived management; and a CEO with long history of failures.

Mr. Crazy Fan, criticism of a company you own does not constitute an affront to your personal honor. Mr. I am right fan, my positive comments about your company's competitor in no way constitute an agreement to meet with pistols at dawn. That throbbing vein in your forehead is a good indication that you're fixated on the wrong things. Embrace the stuff that angries up your blood. You might learn something important.

Pride
I'm right, and everyone else is wrong. We all feel that way, so I'm not going to deliver a blanket condemnation of self-assurance. After all, acting on your convictions is part of the arrogance of investing. If everyone shares the same, correct opinion of a stock, then it must already be fairly priced. We are convinced we can find sweet bargains or future world-beaters ahead of the rest of the crowd. But not every time. If you believe that, you're in trouble.

That's the kind of pride that will kill investors over the long run. The problem is that, in individual cases, the market rewards the ignorant and the informed without pointing out which is which. It's nice to see the long-suffering shareholders finally catch a break, but it doesn't change the fact that plenty of people brought the suffering on themselves by ignoring the firm's consistently deteriorating financials to purchase a pig in a poke.

When a stock goes up, those who bought it purely because they like the product, or hate a competitor, will swear up and down that they are finally being rewarded for their smarts, but the truth is, they're just being rewarded. The trouble with being otherwise deluded is that such irrational pride and (in the long run) the odds, catch up with you. Investing is about maximizing returns, but you can't do that without minimizing risks. There is a difference between being right and being lucky. I've been lucky before in getting out at the right time, but the danger is taking particular pride in it. It scared me into being even more careful with my future decisions. You need to live and learn and plan for the future, ackowledge your winnings but most importantly your losing to grow and learn from them.

Sloth
Let's think a little more about being a sloth, and when it comes down to it sloth is being lazy. There's no room in investing for good, old-fashioned sloth aka laziness. If you are too lazy to look research your stock company, the stock companies nubmers and and proxy statements, you're setting yourself up for some major failures. Yet every day, we are treated to amazing examples of extreme investor laziness. There are countless times you hear about a stock, but then if you get caught into the one of the seven deadly sins of stock picking and decide to be to lazy to do your homework and research then your asking for trouble. Going strictly on hear say information, one person's picks, etc. We see them all the time...but don't get caught being lazy and not doing your homework!

The road to righteousness

Some of history's most successful investors have said it time and time again: The journey to stock market wealth doesn't require superior instincts, faster reflexes, or better information. What it does require is patience, perseverance, and the willingness to do some work and avoid the mistakes that others are too quick to make. If you can steer clear of the seven sins of stock picking, you'll already be one up on Wall Street. Always remember there is room for bears and bulls, but never any room for pigs on "The Street"!

http://www.investingfocus.com/seven-most-deadly-sins-p3.html

• 28 Jul 11

Six classic investing mistakes

Successful investing is as much about avoiding costly errors as it is about finding cheap stocks. Here are six of the best ways to go about losing money.

Done well, value investing is a successful, proven, and safe way to invest. The logic of the approach—buying an asset for less than its underlying value—is irrefutable, and the records of those that practice it are convincing (see Warren Buffett’s essay, The Superinvestors of Graham-and-Doddsville).

However, an understanding of the principles of value investing isn’t enough. In investing, mistakes are inevitable, and the key is to learn from them and avoid repeating them. Moreover, we can try and learn vicariously; through the experience of others.

Over the past 12 years, we at the Intelligent Investor have made plenty of mistakes, and have also had more than our fair share of successes. We’ve learnt from both. What follows is your opportunity to do likewise in six key areas.

KEY POINTS

• Value investing is successful but mistakes will be made
• Six of the most common ones explained
• Illustrated with recommendation case studies

1. Focusing only on the numbers

One of the most common investing mistakes, especially for the inexperienced, is to concentrate only on a stock’s financial data. Applying a price-to-earnings ratio, a book value multiple, or a discounted cash flow analysis can provide very precise estimates of value. But that’s not all there is to analysing stocks, as Gareth Brown’s cover story made clear with the return on equity measure (see ROE: Plusses and pitfalls).

The big four banks, for example, all carry forecast dividend yields of about 6% to 7%, and price-to-earnings ratios of around 10 to 12. Looking at the numbers, they’re closely matched.

Big four bank PERs and dividend yields

	PER	Dividend yield
Commonwealth	12.6	6.1%
NAB	12.7	6.6%
ANZ	11.9	6.5%
Westpac	10.6	7.1%

When you consider the risks entailed by ANZ’s Asian expansion and NAB’s aggressive push for market share however, suddenly the numbers don’t seem to tell the whole story. These qualitative factors are the reason we favour Commonwealth Bank andWestpac over ANZ and NAB.

So, before looking at the numbers, make sure you truly understand the business that’s generating them.

2. Mistaking permanent declines for temporary ones

In the hunt for value, it’s often necessary to buy stocks with a few fleas. When businesses hit rough patches and earnings temporarily decline, it can be a great time to buy. This strategy led to successful Buy recommendations on Cochlear at $19.04 on 18 Mar 04, and Leighton Holdings at $7.83 on 11 May 04.

We have a positive recommendation on Aristocrat Leisure today for the same reason. While mismanagement, a poor product line-up, the strong Aussie dollar, and cyclical headwinds are all hurting Aristocrat in the short term, we expect this business to perform well in the long run.

The risk is if its current problems aren’t temporary. If Aristocrat’s profits stay permanently depressed, we'd have overpaid for this business, and be guilty of having mistaken Aristocrat’s structural decline for a cyclical one.

3. Buying low quality businesses

Owning high quality businesses over the long run is the key to successful investing. Our Masterclass special report on Warren Buffett details his incredible success employing this approach.

Unfortunately, high quality businesses are seldom cheap. Value investors therefore often end up with portfolios full of cheap but low quality stocks, entailing greater risk, more stress, and higher stock turnover.

In the past, Intelligent Investor also fell into this trap, covering too many small and dubious businesses. But with our new focus on blue chips and wonderful businesses trading at fair prices (see Christmas trimmings: introducing the nifty 50/50), you can now fill your portfolio with high quality businesses, especially if you’re patient and buy opportunistically.

4. Neglecting economic considerations

‘If you spend more than 13 minutes analysing economic and market forecasts, you’ve wasted 10 minutes.’ Ever since uttering that sentence, legendary fund manager Peter Lynch gave value investors a free pass to ignore the economy. Or so they thought.

Lynch’s advice does not mean that you can completely ignore the economy. It means that the success of your investments should never rely on specific, short-term economic forecasts. What’s the difference?

An investment in Rio Tinto, for example, hinges largely on the continued strength of China’s economy and its building and infrastructure boom. That’s an economic forecast we’re not willing to gamble on.

On the other hand, we’re aware that weak global economies and low stock prices are currently depressing Platinum Asset Management’s earnings to less than their long term average. That’s why it’s cheap. We don’t need to know when or why, but it’s a near certainty that stock prices, and Platinum’s profits, will rise eventually. An appreciation of cycles, rather than economic predictions, should underpin your stock purchases and disposals.

5. Ignoring the market

As a value investor, a healthy scepticism of the market’s wisdom is a necessity; whenever you buy something, it should be because you think the market is pricing it incorrectly.

When you’re right, the rewards of ignoring the market can be enormous. As our special report RHG: A value investing case study explains, the market wrote this stock down from $0.95 to $0.05 before our positive recommendations were vindicated.

Horse Sense

‘There are two requirements for success in Wall Street. One, you have to think correctly; and secondly, you have to think independently.’ – Benjamin Graham

But when you’re wrong, it can be a disaster. Backing ourselves over the market explains why we were far too late in pulling the pin on Timbercorp.

Share price movements should never influence your analytical process. But it is necessary to be aware of them; they can offer a timely prompt to reconsider your thinking, as we did recently with our downgrade of Harvey Norman. The market is often right. When you’re going against the grain, make sure you know why you disagree with the market and have good reason for doing so.

6. Mistaking price and value

If you’re aiming to buy stocks for less than their intrinsic value, a lower price can only mean better value, right? Wrong.

Shoptalk

Value trap: A value trap is a stock that has fallen in price and is thus mistakenly believed to be undervalued.

Consider Telstra, which is trading close to its lowest ever price. By that simple logic, it should be more attractive than ever. But the decline of its traditional fixed-line business means it’s just not worth the high of $9.20 it hit more than a decade ago, nor the $4.80 or so it traded at in 2008.

It’s tempting to anchor to previous prices (see How anchoring sets you adrift). But they offer no clue regarding today’s value. The fact that a stock has fallen does not in itself make it cheap; only the difference between its intrinsic value and the price at which it trades does.

Avoiding these classic value investing mistakes will do wonders for your returns. In order to get the most out of this article, use this 6-point checklist to sift out these mistakes in your own portfolio. Moreover, ask yourself: 'Do I own quality stocks? Do I have an understanding of how various economic changes may impact my holdings? Do I own stocks where I don't fully understand its underlying businesses?'

Disclosure: Staff members own many of the stocks mentioned above. For a full list of holdings, see the Staff portfolio page of the website.

http://www.intelligentinvestor.com.au/articles/325/Six-classic-investing-mistakes.cfm

http://www.intelligentinvestor.com.au/investors-college/