“Successful and unsuccessful people do not vary greatly in their abilities.
They vary in their desires to reach their potential.” – John Maxwell
You Have to Be an Expert to Manage Money.
The first myth I want to bust is that it takes a lot of time and expertise to manage your money. It would if investing were hard to learn or if getting the information to make a decision took a lot of time. I’ll prove to you that it doesn’t, even though the financial services industry wants us to believe it does. The industry stands to make billions from commissions and fees if it can keep you thinking you can’t invest your money yourself.
You Can’t Beat the Market.
It’s true that 96% of all mutual fund managers have not been able to beat the market in the last 20 years. But you’re not a fund manager and you’re not judged by whether you beat the market. Your financial skill is judged by whether you’re living comfortably when you’re 75. You shouldn’t care whether you beat the market. If the market goes down 50%, but your fund manager loses only 40%, he may have beaten the market, but he still lost 40% of your hard-earned dollars. Does that seem good to you?
Rule #1 investors expect a minimum annual compounded rate of return of 15% a year or more. If we can get that, we don’t care what the market did. We’re going to retire rich anyway. Judged by that standard, Rule #1 investors . . . well, rule.
The Best Way to Minimize Risk is to Diversify and Hold (for the Long
Diversify and hold. Everybody knows that’s the safest way to invest in the stock market, right? But then again, at one time everybody knew the earth was flat. If you know how to invest—meaning you understand Rule #1 and know how to find a wonderful company at an attractive price—then you do not diversify your money into 50 stocks or an index mutual fund. You focus on a few businesses that you understand. You buy when the big guys—the fund managers who control the market—are fearful, and you sell when they’re greedy. Today, more than 80% of the money in the market is invested by fund managers (pension funds, banking funds, insurance funds, and mutual funds). This is what is known as “institutional money.”
Understanding this fact is central to Rule #1: The fund managers control the price of almost all the stocks in the market, but they can’t easily get out when they want to. You and I, however, can be in or out of the market within seconds. And this is a massive advantage for us.
The Price of Something is Always Equal to its Value If I want to buy a new car, I have a pretty good idea what it’s worth before I walk into a dealership—I know its sticker price and I know it’s sold for a range of prices, usually less than the sticker price. I don’t plan on paying whatever the dealer asks.
“Professionals in other fields, like dentists, bring a lot to the layman, but people get nothing for their money from professional money managers.” – Warren Buffett
Knowing you will make money comes from buying a wonderful business at an attractive price.