The Best Investment Advice I Ever Received

by Alexander Green, Chief Investment Strategist    

At the recent Investment U Conference at the beautiful Park Hyatt Aviara in Carlsbad, Calif., the speakers each shared their answer to the question "What is the best piece of investment advice you ever received?"

That's a tough one. Over the past 29 years, I've been a stockbroker, an investment analyst, a money manager and a financial writer. I've made good money in the market. And I've taken my lumps (especially in the early days).

However, we weren't asked to talk about the most important lessons we learned from our own experiences. We were asked to talk about the single best piece of investment advice we'd ever received.

I decided not to pass along some of the obvious ones, even though they hold great value for those who haven't heard them.

Take Warren Buffett's classic encapsulation of stock market psychology: You want to be fearful when others are greedy and greedy when others are fearful.

If you have the guts to follow this one rule, you can ignore everything you ever learned about sales, earnings, cash flow and profit margins. When investors are panicked and filled with pessimism, buy. And when they are supremely confident an asset has nowhere to go but up - be it stocks, gold or real estate - get the heck out.

This Time It's the Same

If you're ever tempted to doubt Buffett's contrarian advice, you might remember another gem I considered using from investment legend John Templeton: The four most dangerous words in investing are: "This time it's different."

Investors who ever got fully margined on stocks, highly leveraged on pre-construction condos or ran to cash near a market bottom could have saved themselves a lot of agony (and money) by heeding Templeton's words. Bubbles form. Bubbles burst. Asset performance reverts to the mean. Bank on it.

I also briefly toyed with something uttered by boxing champ Mike Tyson. "Everyone has a plan until they get punched in the mouth."

Tyson didn't mean this as market advice, of course, but it's entirely apropos. In the past I worked with hundreds of individual investors and was surprised how folks who were confident they would invest for the long term and buy the dips abandoned ship as soon as the waves began hitting the deck.

Everything was hunky-dory until they got punched in the mouth. Then all bets were off.

Your Worst Enemy

But, in my estimation, the truly best piece of investment counsel I ever received was dug from the pages of Benjamin Graham's investment classic The Intelligent Investor. "The investor's chief problem - and even his worst enemy - is likely to be himself."

If you want to see the person most responsible for your investment plans not working out the way you imagined, go stand in front of the mirror.

If you say it's not your fault because you turned your money over to a broker, insurance agent or registered rep who handled it poorly, well, who made that decision to delegate?

If you take advice from an investment letter editor who's been on the wrong side of the market the last five years, well, who decided to subscribe to that letter and act on the advice?

If you say you don't know enough to manage your money yourself, whose fault is that? Investing is not rocket science. Yes, it takes a little time - and a little trial and error - to learn the basics. But if you've spent more time watching Seinfeld reruns than obtaining the knowledge essential to securing your financial future, you'll find little sympathy here.

Taking responsibility for your financial future is liberating. After all, you can't control the economy, can't affect the financial markets, can't set Fed policy and can't foresee the future. But the really important factors you can control.

The Seven Factors

For example, the future size of your investment portfolio will be determined by seven - and only seven - factors:

1. How much you save.



2. How long you let it compound.



3. Your asset allocation.



4. Your security selection.



5. The annual performance of your investments.


6. The expenses you absorb.



7. And the taxes you pay.
 

Only one of these factors you cannot control: the annual performance of your investments. So what should you do? Revisit the list. You should save as much as you can, let it compound as long as you can, asset allocate properly, diversify broadly, minimize your investment costs and tax-manage your portfolio.

If you don't understand these things, you need to. (We talk about them regularly here.) If you aren't doing these things, you should be - in both good times and bad.

History shows that the highest returns don't accrue to those with the biggest brains... but to those with the strongest stomachs. Wall Street is littered with the bones of those who knew exactly what to do at market tops and bottoms yet couldn't bring themselves to do it.

In sum, it's only when you take responsibility for your investment decisions that you experience success and the security and satisfaction that comes with it. And if you don't find success?

As Shakespeare reminds us, "The fault, dear Brutus, is not in our stars, but in ourselves."

Good investing,

Alex