The worst thing that happened in my investing history, was when the first stock I bought shot up 100%, in just a few months. Does that seem counter-intuitive? Well, let me explain…
I bought shares in a company called Ceramic Fuel Cells Limited (ASX: CFU) in February of 2009. Just a few months later, shares had more than doubled. I sold most of them, and made a handy profit. I figured I was a share-market genius to get returns like that.
Wrong. In fact, that stock is down about 80%, five years later.
My 100% return was 100% luck. But that bit of "luck" lead me to naive overconfidence – and I made a bunch more bad decisions over the next 18 months. My problem was that I skipped some important steps in my investing education – I spent my time "investing" not learning to invest.
It wasn't until I under-performed the market (and wiped out all my gains) that I realised that I needed to invest in my analytical ability, before investing in stocks. As my more recent results show, this decision – to take my investing education more seriously – has paid off in spades. For me, the best investment I ever made was in my own knowledge.
So in that spirit, I'd like to share some insights from The Motley Fool's co-founder Tom Gardner. Tom is a value investor, and on average his Share Advisor picks are beating the market by over 30%, over more than 10 years. That's a record to be proud of.
On Diversification
"For the majority of the population, making sure that you have a portfolio that's not going to bring heart-wrenching moments for you when there are down periods [will help you not] over-react emotionally at a bad time."
This is interesting advice, because it slightly conflicts with Warren Buffett's advice that: "Diversification is protection against ignorance. It makes little sense if you know what you are doing." But at the end of the day, ordinary investors cannot possibly know as much as full-time professionals with plenty of connections and a life time of experience. Tom's advice is valuable for less experienced investors because a big part of what will determine our returns over time is mastering our emotions. Diversification, owning at least 12 different companies across different industries, lets us do that. Tom also has some thoughts on how to run companies:
On business culture
"The greatest businesses to own for the long term have correspondingly a great internal culture where people love to go to work and are proud to be a part of that organisation."
As the old saying goes – judge a person by how they treat their subordinates. You can get a great measure on management by looking at how they treat employees.
