There may be no better time to review great investment quotes and the timeless lessons they convey than when the markets are maddening.
Over the years, legendary investors like Benjamin Graham, Warren Buffett, Peter Lynch, and Sir John Templeton have provided investment insights based on a lifetime of mastering the craft. Here are just a few to keep ever present:
1. “Rule number one: Don’t lose money. Rule number two: Don’t forget rule number one.”
- Warren Buffett
The counterintuitive point for many investors to keep in mind is that investment risk isn’t about how much can be gained; it’s about how much can be lost.
Big losses are the death knell to a portfolio, and that’s why great investors focus first on risk, not returns.
It’s important to note that losses are an inescapable aspect of investing. Certainly, Warren Buffett has had periods where he’s lost money. But what he and other greatinvestors rarely take are “big” losses, and that'sthekey differentiator to long term outperformance for nearly every great investor.
A good example of a “big” loss is the tech and telecom crash of 2000, whenthese two sectors lost about 70% of their value. To put that loss in perspective, after a 70% decline, you’d need a 233% gain just to break even. In a healthy investment environment that would take well over 15-years.
Not coincidentally, great investors like Warren Buffett sidestepped the dot-com bubble by recognizing the mania and sky-high valuations as classic red flag indicators.
2. “The most important quality for an investor is temperament, not intellect.”
- Warren Buffett
Deciphering and mastering the investment world isn’t about quant models and mathematical genius. It’s about having profound respect for Mr. Market’s ultimate weapon of choice… human behavior.
Failing to appreciate the behavioral aspects of investing is the most common pitfall to investment success. As Benjamin Graham so famously quipped, “The investor’s chief problem - and even his worst enemy - is likely to be himself.”
The rare genius all great investors share is apercipient understanding of the instincts, emotions, and tendencies of investment behavior.
Specialist Meric Greenbaum works at his post on the floor of the New York Stock Exchange, Friday,... [+] Aug. 28, 2015. U.S. stocks are opening slightly lower after a sharp two-day surge, as the stock market closes out a wild week. (AP Photo/Richard Drew)
3. “The four most dangerous words in investing: ‘this time it’s different.’”
- Sir John Templeton
This is one of the most important quotes in investment history. Unfortunately, it’s often misunderstood. Of course, things are always different from one era to the next, but what does not change from era to era is human behavior and the formation of market extremes.
In the past decade and a half we have had several great examples of investment sector extremes. Remember the gurus that explainedthe dot-com years by stating it was a new era and the old metrics of valuation did not apply? How about the housing boom? Recall the experts in late ‘05 stressing why this time was different, and that the record shattering valuations weren’t a problem?
Identifying extremes is easy in retrospect, but for most investors it’s very difficult in the moment. That’s because the natural human tendency is to chase performance, and the brighter the glow, the more average investors clamor to buy.
Here are a few things to consider regardingequity sector extremes. Timespan is important, extremes take years to develop; a year, two, or even three is typically not enough. The thing to look for is outperformance above the broad market for more than three years. Sectors in a classic bubble formation have usually outperformed for more than four years.
Both the dot-com and housing sectors maintained outperformance for just over five years. For the average investor outperformance for three or four years is an almost irresistible buy, yet history clearly shows us that performance extremes do not last, and when they fail the damage to investors is usually substantial.
Today, we are about three-and-a-half years into a biotechnology cycle of broad market outperformance, and right on cue, we’re just beginning to see the new paradigm “it’s different this time” argument. Biotech may not be a full red flag just yet, but it’s certainly one to watch.
4. “There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.”
- Peter Lynch
Many smartindividuals mistakenlyfall for the premise that complexity is a keycomponent tosuperior performance. Wall Street’s product industry has cultivated and reinforced this fallacy for generations.
In fact, nothing could be further from the truth. In the end,complex investment strategies almost always suffer from chronic underperformance. And regardless of the hype and prestige these investments are commonly cloaked in, they are usually designed to firstand foremost enrich those managing and selling them.
For the experiencedand noviceinvestor alike, straightforwardand transparent investments are almost always the best of all options.
5. “It would be wonderful if we could avoid the common setbacks with timely exits.”
- Peter Lynch
Stocks have historically provided long-term returns far better than bonds orcash but there is a price to pay. And that cost is realized in meaningless short-term market swings that can and will frustrate even the most seasoned of investors.
It’s a psychological toll that must be embraced, and sometimes that can be very difficult indeed, but there is simply no getting around this point. And unfortunately, those that seek out the endless alternatives often end up with the worst of all outcomes - expensive investment products and chronic underperformance.
In Closing
The legendary investors of the past and present provide a timeless foundation for investment success. The great irony is that the lessons of risk management, extremes, simplicity, and investment behavior are all readily available, yet the majority of investors will never seek them out, and that’s the opportunity for all that do.
