Market prices are often fairly accurate over the long run, but they can be greatly swayed by investors’ emotions in the short term. As Warren Buffett, the Yoda of investing, always says: “Be fearful when others are greedy and greedy when others are fearful.”
Remember, no one knows for sure what’s going to happen in the future. Yet many people in the financial community pretend to have a crystal ball in order to give a false sense of security to those whose money they want to “manage.” This is why analysts’ project corporate earnings (and then revise them) and why market strategists project the Dow to end the year at exactly 17,616 or for oil to trade at $20 a barrel.
Keep in mind that “forecasts may tell you a great deal about the forecaster; they tell you nothing about the future.”
“You know better than to trust a strange computer.”
-C-3PO, to R2-D2 (Episode V: The Empire Strikes Back)
Along the same lines as above, don’t blindly trust other people’s projections. And don’t forget that models are precisely inaccurate. They can be a helpful tool for valuation, but models do have limitations. The more complicated a model is, the more important it is to remember this fact.
You don’t have to be a genius to be a good investor. Just be very smart in some areas… and stick to those areas. Investing within your circle of competence means investing in the companies and industries that you know and can understand.
4. Invest for the Long Term
“Adventure. Excitement. A Jedi craves not these things.”
-Yoda (Episode V: The Empire Strikes Back)
“You don’t have to do this to impress me.”
-Princess Leia, to Han Solo (Episode V: The Empire Strikes Back)
-Han Solo, to Luke Skywalker (Episode IV: A New Hope)
Things like day trading might sound exciting. But if you want an adrenaline rush, then I suggest jumping out of a plane. A good value investor knows that slow and steady wins the race. There is no need to take crazy risks in order to chase big returns. It’s hard to get rich quickly in the stock market – but it’s incredibly easy to get very wealthy over time if you’re focused on the long term.
Value investors look for assets that are – obviously – undervalued. But to be undervalued, a stock has to be perceived to be worth less by other investors than you perceive it to be. To find these opportunities, you are going to have to do some digging beneath the surface.
Hell, Luke was a farmboy on Tatooine and Rey was a scavenger on Jakku. Even R2-D2 and C3PO once found themselves in a Jawa thrift store (of sorts). They were all diamonds in the rough. But you need to comb the desert to find them. It will be hard, but don’t just try – do.
Traps can come in many forms. Maybe it’s an actual value trap. Or maybe it’s the trap of a cognitive bias, such as using past performance to predict the future; seeking out only the data that confirms your original hypothesis; or being unwilling to sell your worst stocks. Watch out for these.
Also, when the stock market is rising, when euphoria is in the air, and when the rising tide is lifting all ships, it’s very easy to abandon your principles in search of higher returns. Don’t lower your defenses. Keep your guard up and be wary of traps.
Finally, if you’re sure of your analysis and you’re sure of yourself, then you must stick by your decision. Value investors almost naturally are contrarians. This sometimes makes it hard to have faith. But ignore all the noise and be willing to sit patiently while you quietly work your way toward your goal.
So there you have it. Listen to the heroes of Star Wars and beware of fear and greed, don’t trust market projections, keep within your circle of competence, invest for the long term, find undervalued investments, limit your risk, and stay the course.