5 investing lessons these Fools wish they’d learnt on day 1

Before you continue reading this article, we’ll ask you to bear in mind two things: firstly, every investor has a ‘first day’; and secondly, it’s never too late to start your investing journey!

And investing is a journey, following pathways full of twists and turns — yes, even the occasional dead end.

So let’s hear some advice from some of our Foolish contributors, all of which ought to be useful to novice and experienced investors alike…

Doubling down on the same sector is not diversification

By Harvey Jones. There’s nothing like a bull market to encourage people to start investing, and I cut my teeth during the crazy tech stock boom of the late 1990s.

I watched in awe as Aberdeen Technology skyrocketed to the stars, fuelled by its portfolio of dotcom hopefuls.

Month after month it rose, and although I was dimly aware that tech was a supersized bubble, ultimately, I couldn’t resist.

I finally invested a lump sum of £1,000 – a lot of money for me at the time –  in January 2000. My worries were eased as the fund continue to soar throughout January and February, so I decided to pump in more cash. 

I had a brilliant plan, though. Instead of doubling down on Aberdeen Technology, I would spread my risk by investing £1k in Aberdeen European Technology. Which had also been booming, funnily enough.

I bought it in March, one week before the bubble burst. Both Aberdeen funds had been driven by exactly the same speculative forces, and both were destroyed by them. They were worth peanuts when I finally sold them.

The lesson I learned is that if I’m going to diversify, do it properly. Don’t invest in exactly the same sector, asset class or trend, but under a different badge.

There’s more to investing than looking at balance sheets

By Stephen Wright. The investing lesson I wish I’d learned on day 1 comes from something Charlie Munger once said to Berkshire Hathaway shareholders. It goes like this:

When you’re trying to determine something like intrinsic value and margin of safety and so on, there’s no one easy method that could be simply mechanistically applied by, say, a computer and make anybody who could punch the buttons rich.

For a long time, I thought that the answer to whether or not a stock was a good buy could be found somewhere in its statements of accounts. I now know that isn’t the case.

What matters far more is stuff that doesn’t show up anywhere on a balance sheet. Things like the company’s culture and the position of its products in the minds of its customers.

I think it’s easy to get distracted by numbers like price-to-earnings (P/E) ratios, dividend yields, or cash flows. And while these are important, intangible factors can matter just as much.

Warren Buffett and Charlie Munger’s advice has helped me see several ways in which investors can go wrong. But I think this lesson is the most important one that I wish I’d learned sooner.

Stephen Wright owns shares in Berkshire Hathaway.

Don’t rush portfolio construction

By Zaven Boyrazian. Patience. It’s one of the most essential virtues any long-term investor needs to have in their arsenal. And yet, it’s often misused when first setting off on an investing journey – something I was certainly guilty of.

I’m not talking about buy-and-hold investing (although that also requires patience). I’m talking about portfolio construction.

The most common piece of advice that’s floated within the investing community is to diversify. Taken at face value, building a diversified portfolio is prudent. By spreading the risk across multiple industries and geographies, a portfolio can be less exposed to sudden drops from any single position.

But something that’s often not mentioned is the fact that diversification can actually be harmful.

Investors rushing to diversify their portfolio into different sectors often end up buying shares in mediocre businesses. Or even worse, they may end up owning companies they don’t fully understand.

Yes, investors should seek to diversify their risk. But it needs to be done with patience. A portfolio does not need to be diversified on day one. Companies can be gradually added over time after careful consideration. That way, when the portfolio is eventually complete, it will contain nothing but the best businesses an investor has found across multiple industries.

Don’t forget, it’s the fantastic businesses that can generate sustainable market-beating returns.

Warren Buffett’s tip on America

By John Fieldsend. When I first started investing in stocks. I had the idea that developing countries were a better place to put my money. My thinking was something like the Western world has had its growth, other countries are going to catch up. 

I put a large part of my savings at that time into a developing countries ETF. I still hold the position, and I can see from my broker that it’s been one of my worst performers. 

My thinking now can be encapsulated in the famous Warren Buffett quote: “For 240 years, it’s been a terrible mistake to bet against America, and now is no time to start.”

Essentially, the conditions in a country that have created great companies in the past will continue to create great companies in the future. Like Buffett says, I believe it’s true of America, and I think it’s true of the UK as well. 

Now, I invest in mostly in regions that have shown themselves in the past to be great places for investors to put their money.

Pick businesses not stocks

By Ben McPoland. Warren Buffett has said that he and his right-hand man Charlie Munger “are not stock-pickers; we are business-pickers.” I think this is such an important lesson, and certainly one I wish I’d internalised when I first started my investing journey.

To illustrate, imagine that a couple of strangers approach me and ask if I’d like to become an investor in their business. They tell me about their product and the size of the potential market opportunity. 

Naturally, like the investors in the TV show Dragons’ Den, I’d like to think I would scrutinise the business plan and projected financials. I’d want to know all the ins and outs. After all, I’d be entrusting them with my money in the hope of a future return. So far, so obvious…

But strangely this isn’t how many new investors approach individual stocks. They may put a large chunk of money into a small-cap stock they’ve just read about online. Or a biotech with no sales or approved drugs. Then suffer large losses (I’m speaking from experience).

The lesson here then is that behind every stock is a real-world business. I become a part-owner (however small) in that enterprise when I buy its shares. And I’m essentially entrusting my money to the executives running the firm. Keeping this front of mind has helped my investing enormously.