Charlie Munger likes to say
So often we focus on the success of people but not enough on the mistakes that they make. Sometimes, we need to look at the things that caused people to fail in order for us not to fall into the same holes.
Before we get into the actual investing specific mistakes. There is one mistake that most people make when it comes to investing that totally derails their entire financial journey.
That mistake is simply NOT INVESTING!
It is a bigger risk to not invest than there is investing.
I also apologize for the amount of Warren Buffett quotes, you will see in this post. He is the oracle of investing for a reason. SORRY!
Now to business:
Investing what you can't afford to lose
Sometimes the best investment you can make is not to make one at all
If you know you need the money in the short term (3-5 years) for something like bills, an emergency fund, a house down payment, a new car, etc. PLEASE do not invest that money
I know it is tempting to believe that if I just invest I can get x% but the stock market is not that nice. That will be the moment things go left on you real quick
See S&P 500 returns in the last two months
Using Leverage
I like to say leverage is a two-edged sword. Sure it can kill your enemies but you use it improperly and you will cut your own head off too
Leverage makes things go a lot faster because you are using "other" people's money to make money.
This is why the number one thing you hear about real estate is the fact that you never have to use your own money
But the thing is eventually other people will want their money back and if you cannot produce it they will take everything else from you.
Just as leverage amplifies the upside, it certainly magnifies your downside
The problem with leverage in investing is that usually when stocks are falling is when people want their money back and that is usually the best time to buy
There is no need to rush the process
Too much concentration
I know the saying
What that quote leaves out is that Concentration has ruined more people than it has made rich
People love to point to people like Warren Buffett or Charlie Munger or Peter Thiel or fill in the blank person who has become a billionaire by betting big
No one talks about Jesse Livermore (who was the greatest trader of all time. He made Buffett look like nothing)
Or Rick Guerin who was part of the Berkshire partnership but you probably have never heard about
Remember in investing your goal is to keep compounding no matter what, but if you get wiped out, compounding 0 is 0.
Concentration can win battles from time to time but diversification helps you win the war.
Not understanding Risk
Risk is not the wild swings of the market. That is volatility
Risk is not understanding what you are getting yourself into.
Risk is rushing in without thinking.
Risk is doing what everyone else does without understanding why
Risk is completely based on your personal understanding of the investments you are making
I love to say “Know Thyself”, what works for someone else may not work for you. Therefore, you need to understand yourself before you go into any kind of investment
For example, I barely understand crypto so I do not make major investments in the space. I have friends who have become millionaires with it.
Some may say, “You missed out.” Maybe but at least I can sleep well at night
Making Emotional Decisions
When you do not have an understanding of what you are doing. You do not base decisions on reasoning but rather on emotion
Emotions are great to tell you where you are but horrible for decision making
I think Peter Lynch puts it best
Because there will come a time when you see your investment fall 20, 30, 40, 50% and the question is '“What will you do?”
If you understand why you made the investment, it is a lot easier to deal and tolerate with it.
If you don't, or you did one of the other things above. You could end up in a place you regret.
This was a bit of a different style to the newsletter but let me know your thoughts. I will be back with the regular style posts next week.
Thank you for reading.🙏🏾
I hope you all have A WONDERFUL week and weekend. Go subscribe to Rambling Mind Podcast for more personal finance and investing thoughts. You can also catch me on TikTok, Instagram, and YouTube every day.
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God bless Each and Everyone of y’all
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