The key to financial freedom is putting your money to work for you – instead of you working for your money all the time. You’ve got to make your dollars or euro’s your employees who are working 24/7 to provide you with more money in the future. However, so many people struggle to do this successfully, while it doesn’t have to be complicated, risky or difficult at all..
Therefore, I’ve decided to share my top 7 investing lessons from the best investing books I’ve read so far – so you’ll be able to make more profitable investments, avoid stupid mistakes – and put your money to work for you!
Note: This article includes affiliate links. If you purchase books through these links, I will receive a commission (at no additional cost to you). I only ever endorse books that I have personally read and benefited from. Thank you for your support! – Jari
Investing Tip 1: Always have enough cash reserve that can be used to double down in a down market. Possessing excess capital during a crisis puts one in the driver’s seat.
Book: The Templeton Touch – Sir John Templeton
This advice from Sir John Templeton should be part of every investors personal mantra. Having a large enough cash reserve to double down in a down market is one of the fundamental parts of my personal investing strategy. In a down market, stocks tend to trade a discount because (over)pessimism rules the market, this is where the big bucks can be made! However, when you have no capital available to invest, you would miss out on some great investment opportunities.
Bonus advice from The Templeton Touch:
“You not only need to be patient to find great candidates for investment, you need to be disciplined enough to say no to those that do not fully qualify. For those that do, you have to have the courage to buy when all other investors around you are fearful.” – Sir John Templeton
Investing Tip 2: What counts for most people in investing is not how much they know, but rather how realistically they define what they don’t know. An investor needs to do very few things rights as long as he or she avoids big mistakes.
Book: The Essays of Warren Buffett – Warren Buffett
Warren Buffett, legendary investor and one of my personal role models, is one the most valuable sources of knowledge for the investment community. With the above quote, he points out one of the biggest mistakes investors make. They are overconfident in their own abilities, and being overconfident will lose you a lot of money in the stock market.
Realistically define what you don’t know and stay away from those sectors and investments. For example, why should you invest in a biotech company if you don’t understand the sector? Avoid the mistakes and bet on your strengths to maximize your wealth.
Bonus advice from The Essays of Warren Buffett:
It’s too hard to make hundreds of smart decisions. Therefore, we adopted a strategy that required our being smart only a very few times. We’ll now settle for one good idea a year. – Warren Buffett & Charlie Munger
Investing Tip 3: Be fearful when others are greedy and greedy only when others are fearful.
Book: The Warren Buffett Way – Robert Hagstrom
One of the other major pitfalls for investors, besides overconfidence, is herd behaviour. Whereas individuals can make very smart decisions, crowds tend to make very stupid decisions.
Herd behaviour drives stock prices irrationally high, such as during the late 1999’s / early 2000’s causing a major tech bubble to burst which evaporated billions of dollars in a very short time. The optimism about the ‘never ending rise in stock prices’ enforced greed and lead to a crazy situation in the stock market. This is where the ‘Be fearful when others are greedy’ part plays its role.
Looking at the other end of the spectrum, the fear and pessimism in the stock market during the 2008 crisis provided some very good investment opportunities for the investors that were ‘greedy when others are fearful’.
Although the advice itself is very simple, acting upon it is much harder. The human brain is hardwired to avoid pain and wants to protect us from harm at all cost. It goes against human nature to move against the crowd and doing so requires self-control and discipline. However, this self-control and discipline can pay off greatly – my most profitable investments are those made in situations where the market was crashing and the majority of investors were scared.
Investing Tip 4: ‘Mr. market’ will be an irrational business partner every now and then.
Book: The Intelligent Investor – Benjamin Graham
Graham’s Mr. Market is a fellow who turns up every day at the stock holder’s door offering to buy or sell his shares at a different price. Often, the price quoted by Mr. Market seems plausible, but sometimes it is ridiculous. The investor is free to either agree with his quoted price and trade with him, or to ignore him completely. Mr. Market doesn’t mind this, and will be back the following day to quote another price.
Here is an excerpt from ‘The Intelligent Investor’ :
“Imagine that in some private business you own a small share that cost you $1,000. One of your partners, named Mr. Market, is very obliging indeed. Every day he tells you what he thinks your interest is worth and furthermore offers either to buy you out or to sell you an additional interest on that basis. Sometimes his idea of value appears plausible and justified by business developments and prospects as you know them. Often, on the other hand, Mr. Market lets his enthusiasm or his fears run away with him, and the value he proposes seems to you a little short of silly. If you are a prudent investor or a sensible businessman, will you let Mr. Market’s daily communication determine your view of the value of a $1,000 interest in the enterprise? Only in case you agree with him, or in case you want to trade with him. You may be happy to sell out to him when he quotes you a ridiculously high price, and equally happy to buy from him when his price is low. But the rest of the time you will be wiser to form your own ideas of the value of your holdings, based on full reports from the company about its operations and financial position.”
In other words, the market will be irrational at times and the successful investors realizes that he/she does not have to sell at those points, or even look at the stock quotations from day to day. Trust your careful study of the company and have the confidence to stick with your decision as long as you did your homework.
Investing Tip 5: The majority of investors are better off buying and holding a low-cost, diversified portfolio of stocks instead of picking their own stocks.
Book: A Random Walk Down Wall Street – Burton Malkiel
I can write an entire book about why a ‘buy and hold’ strategy is most suited for the majority of investors. While so many investors try to ‘beat the market’, most would be better off to actually try to mimic the market through a low-cost, diversified investment. This strategy has been researched by academics for decades and turns out to be the winner of all investing strategies.
Did you know that 95% of the professional mutual fund managers are not able to consistently outperform the market? Because too many investors make the mistake to trade too often, they incur unnecessary loses which could have been avoided when simply buying and holding a low-cost, diversified basket of stocks.
This is why I’m such a big fan of passive investing – you avoid many costly mistakes, you have to spend very few hours per year on investing, yet you still profit massively from the stock market. Win, win, win!
Investing Tip 6: Each individual has enough inherent knowledge and experience to be a successful investor.
Book: One Up on Wall Street – Peter Lynch
Peter Lynch is one of the legendary investors of Wall Street and his advice on investing is a relatively unique one. He argues that investors should take more advantage of their specific knowledge. Think of all the topics you know more about than your family, friends and colleagues. Do you have a certain hobby that you are an expert about? Chances are that behind those hobbies there are companies producing goods/services of which you make use. Companies which you can invest in. Knowing the ins and outs of something provides you with a distinct advantage over other investors. Or maybe you work in a certain sector in which you have expert knowledge. Put this knowledge to your advantage!
Investing Tip 7: Set financial goals!
Book: Think and Grow Rich – Napoleon Hill
Although think and grow rich is not a book specifically about investing, it’s very relevant for investors. One of the important lessons I learned from Napoleon Hill is the importance of goal setting. Setting a goal provides a lot of clarity and serves as guidance especially during hard times. Setting a specific financial goal will help you realize why you are investing, which serves as a motivator to keep on learning and investing in yourself. A specific financial goal should include :
- A specific, and realistic (but ambitious) amount of money you desire.
- Determine exactly what you intend to do in order to earn the money you desire. Determine your plan. Remember, there is no free lunch.
- Establish an exact date for when you plan to possess the amount of money you desire. I suggest somewhere far into the future, compound interest is the driver behind growing your wealth and it takes time to get the ball rolling.
- Establish a definite plan for achieving your desire, and start right this moment, whether or not you feel you’re ready.
- Write out a clear statement of how much money you are going to acquire (the amount from step 1), what you intend to do in exchange for the money (the value from step 2), the date you’ll acquire it by (the date from step 3), and your specific, actionable plan for reaching the desired monetary goal (the plan from step 4).
Twice daily, read your written statement out loud to yourself. Do it once in the morning, and once at night. While you read the statement, visualize yourself executing on your plan and visualize the money in your possession. It might sound stupid at first, but believe me.. the power of the right mind-set is very strong.
It’s funny how these 7 investing books have taught me MUCH more about how to invest successfully than my university classes managed to do (while I studied Finance and Investing…).
So, save yourself a lot of time & money and go check out some of these books if you want to learn how to invest profitably in the stock market – while keeping the risks as low as possible.
Have an awesome day!
Founder Personal Growth Lab
PS: Join The PGL Book Club! Get immediate access to my entire ‘digital library’ of most valuable lessons from each of the self-development and business books I’ve read! (For FREE)
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Disclaimer: Please always check with a professional before making any moves with your money. This content is for educational purpose only. No official financial advice is being given. Never listen to anyone online who tells you to not check with a professional!