Investing Lessons for my Son
First off, I realize it’s been a few weeks since I last posted a newsletter. Work has been picking up, and things got away from me a little bit.
A while back, I wrote about Money Lessons for my son. Today, I’d like to focus specifically on investing lessons that I’d like to teach my son. Money and investing go hand in hand, but where my last piece was more general, this focuses more on things I want him to remember as he earns money and tries to grow it for his own future.
1. There is no reason to risk what you have and need for what you don’t have and don’t need. Investment writer Carl Richards has said that “Risk is what’s left over after you think you’ve thought of everything.” Understanding risk is essential to being a good investor. The best investors understand that risk and return are inextricably linked, but there’s no reason to play for more than you can afford to lose. As Morgan Housel has written, “The odds are in your favor when you play Russian roulette, but the downside isn’t worth the potential upside.”
2. Related to the above: Room for error is underappreciated. Leaving yourself a margin of safety can make all the difference in the world. This will mean that you miss out on some opportunities, and when things are going great, you’ll feel the sting of those “missed” opportunities. You may see your friends make a ton of money in something like bitcoin, but when times are bad, you’ll be glad for your cash balance.
3. You have no edge. There are extremely well-trained and highly paid professionals in the investment industry. You are likely not among them. You have none of the information available to them, to think that you have an edge in any type of investment is dangerous. The only “edge” that the average non-professional investor has is his ability to control his own emotions. The benefit that non-professionals have is that their compensation isn’t on the line for each specific trade. You can afford to take the long view and ride out a bad quarter.
4. Long tails drive everything. In Venture Capital, most returns are attributable to a handful of investments. But the same concept holds true for plain vanilla stock market indices like the S&P 500. In 2017, the index rose by 22%, but 25% of that return came from Amazon, Apple, Microsoft, Facebook and Boeing. The trick is that you don’t know what companies in the future are going to drive overall market gains (remember, you have no edge). The easiest way to benefit from a long tail is to own the entire market.
5. Charlie Munger, Warren Buffett’s business partner once said that “The first rule of compounding is to never interrupt it unnecessarily.” Investing over the long term can create serious wealth, but it takes time. You reduce your potential for success in making money from your investments if you sell at inopportune times. You will never get the timing right, and you’ll end up missing out on the biggest gains (remember, tails drive everything)