Lessons learned from three decades of investing
Author: Daniel Kern
Source: Kiplinger
All investors will experience their share of success and failure. The market doesn’t play favorites. So what separates the best investors from the rest? It’s the lessons we learn along the way and how we apply them going forward.
Following are some of my top takeaways from three decades of investing:
Reaching for yield is usually a bad idea
In a meeting early in my career, a corporate CFO questioned the logic of risking his career to seek a quarter-percent higher yield on the company’s short-term investments. That simply stated advice has stayed with me, as I’ve seen investors lose money by taking unnecessary risks to gain a relatively small amount of incremental yield. The low-yield environment made it particularly tempting to reach for yield in the years following the global financial crisis.
Higher-yielding investments may have a portfolio role, but investors should do their homework to assess the viability of bond coupon payments and principal repayment before investing. Equity investors seeking dividend yield should do similar work, evaluating the sustainability of current dividend payments (which are not guaranteed) and the valuation for the stock and the prospects for growth.
It pays to think about what could go wrong
Most investors focus on the positives when researching a new investment idea, creating a thesis around what they expect to happen with the stock. I’ve spoken with legendary investors who balanced the inherent optimism of that approach with the use of an investment “pre-mortem” before buying new stocks.
In a pre-mortem, the investor assumes that at a predetermined future date, an investment will have become a failure. The investor uses the pre-mortem to identify reasons why the decision might not work, which can help identify potential flaws in the investment thesis or future signals that would reveal signs of trouble for the investment.
Investors who allow for the possibility of failure will be better equipped to avoid making bad investments or to more quickly identify when an investment isn’t working and should be sold.
Seek those who have advice on how to be a better investor
The airwaves and bookshelves are filled with advisors discussing what investors should think, or sharing tales of investment success. Investors may learn more from those who offer advice on how to become a better investor. Seeking insight into how to invest is likely a more productive endeavor than listening to war stories about someone’s recent investment win.
Investing is a continuous learning process, and this is by no means a complete list. That being said, I hope these lessons from my own experiences provide some practical guideposts as you proceed through your investment journey.
This article was written by Cfp®, Daniel Kern and Cfa® from Kiplinger and was legally licensed through the DiveMarketplace by Industry Dive. Please direct all licensing questions to legal@industrydive.com.
