The 1 Thing I Wish Someone Had Told Me When I First Started Investing

By Markets Fool.com


Source: Flickr user David Goehring.

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We were all investing novices at one point -- even Motley Fool analysts and contributors. Looking back on our first forays into the stock market, we're liable to find many mistakes that we can't believe we made at the time. If only someone had told us then what we know now, we wouldn't have made those critical mistakes!

With that in mind we asked five of our top analysts to discuss one thing they wish someone would have told them when they first started investing. Here's what they had to say.

:I made so many mistakes as a newbie investor that it's hard to choose just one to focus on. One thing I wish someone had told me when I first started investing is that a strong recent performance does not foretell a strong future performance. In my initial naivete,I got excited by many great performances and assumed they'd continue at similar rates. For example, way back in 1994, I noticed that the Fidelity Emerging Markets fund had surged by 82% in 1993. 82%! Who wouldn't want that kind of annual return? Eagerly, I invested in it, expecting spectacular returns, even if they weren't quite 82%. Well, in 1994, the fund lost 18%. In the next few years it went up a bit and then down a bit, and down by a whopping 41% in 1997. It didn't make me a lot of money.

I made similar mistakes with stocks, assuming that a crazy growth rate would persist, when, over the long run, a stock's price will grow in relation to company performance. If revenues are growing by 10% annually, it's wrong to expect 30% annual gains. When a stock price rises too quickly, it often returns to earth eventually.

And by the way, here's another lesson related to that 82% Fidelity fund performance: Whenever a stock or fund has a wild result some year, that gets included in its multi-year average annual returns, pushing them significantly higher or lower. Remember that a five-year average annual return of, say, 20% doesn't mean that the stock or fund grew by something like 18%, 20%, 19%, 22%, and 21% in five years. It could mean that there was one great year and four years of losses. Look closely at each year's returns to see if there's an outlier result heavily influencing the average

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When you start investing, be realistic in your expectations. Know that the stock market's long-term annual average return has been around 10% and that some years can be much higher or lower. Know that stocks and funds don't go up in straight lines. Expect volatility, and beware of fluke years.

Dan Caplinger:I wish that someone had told the 17-year-old me that I didn't have to pay a sales load to buy my first mutual fund. As a high-school student with $250 to invest from my summer job bagging groceries, I didn't know any better than to go to my local bank, where a broker sold me shares of a well-known stock mutual fund with a 5.5% upfront sales load.

I've held onto those shares ever since, and my initial $250 investment has ballooned to more than $3,000, despite having endured the crash of 1987 and the 2000 and 2008 bear markets. Yet it still annoys me that the $13.75 that the broker took out of my initial investment would have added another $165 or so to my total account balance.

Fortunately, I learned quickly that cheaper alternatives were available, and I quickly switched to no-load mutual funds for future investments. Since then, mutual funds with sales loads have become somewhat less common, and the rise of low-cost exchange-traded funds has given investors another attractive choice to minimize the friction of investing costs on your overall returns. Nevertheless, having learned the hard way about the costs of investing really underscored the importance of keeping as much of your hard-earned money for yourself rather than letting professionals siphon off part of your investments for their own personal gain.

Keith Speights:"Buy and hold" doesn't mean "buy and forget." I definitely wish someone had told me that as a newbie investor years ago.

Back in the early 1990s, I bought shares of a growing, dynamic company in a hot sector. The management team seemed to have a smart strategy. The stock kept on producing terrific returns. At one point, I had more than doubled my initial investment. Buy and hold was working like a charm.

After a while, though, troubling signs started to emerge. The stock began to slip. That smart management team began to be accused of illegal activity. The stock fell more. I paid no attention. After all, I had bought the stock for the long run.

Who was that growing, dynamic company? WorldCom. Yep, the one-time telecom giant that no longer exists. The one whose CEO earned jail time. My 100%-plus gain eventually became a 100% loss.

Buying for the long run is smart. Forgetting to check in routinely on the underlying business fundamentals isn't. I learned that lesson the hard way.

Dan Dzombak:When I first developed an interest in the stock market I started investing with a virtual portfolio on Marketocracy. While you can learn the basics of investing with a virtual account it is nothing like the real thing -- there's no real emotion in it. I wish someone had told me to immediately open an online brokerage account and start investing real money when I started.

It is gut-wrenching when a stock you bought goes way down. When it is just play money and not your hard-earned dollars that you see draining away it is easy to just shrug it off. In investing, when a stock is down, the hard part is deciding if you made a mistake in your research and should get out, or if your research was right and the market is wrong.

The flip side is when a stock of yours takes off and you hang on for a wildly profitable ride. All the way up you need to decide if there is still opportunity or your money would be better off elsewhere. Many people sell way too early and miss out on massive gains.

One of the keys to Warren Buffett's success is temperament, meaning an ability to control your emotions.As Buffett has said, "The most important quality for an investor is temperament, not intellect. You need a temperament that neither derives great pleasure from being with the crowd or against the crowd." That's easier said than done. The sooner you start investing in real life the sooner you start developing that temperament.

: When I first began investing at age 18 I felt invincible and, like my colleague Dan Dzombak, probably wasn't ready for the roller coaster of emotions that was bound to overwhelm me switching from the Stock Market Game 2000 simulation to an E*Trade brokerage account.

However, I felt I had a surefire plan up my sleeve for success: I was going to spend hours scouring Yahoo! Finance's stock screener and select only the most attractive value stocks. Utilizing forward P/E ratios, book value, cash on hand, and trailing profit margins there was no way I could be wrong. I mean a P/E of nine in the tech sector has to go up, right?

Wrong! My stock account got hammered because I fell prey to one of the most fundamental flaws of investing: relying on metrics to teach me about a company rather than fully understanding the inner workings of the business itself. Numbers can tell you where a business has been and, if you're lucky, where it might be headed, but financial metrics rarely tell you anything about what a company does or how the dynamics of its industry are evolving.

In order to be a successful investor you need to take the time to dig into financial reports and fully understand the opportunities and risks associated with each and every company you buy. Financial metrics may be a good starting point, but they're no substitute for old-fashioned research.

The article The 1 Thing I Wish Someone Had Told Me When I First Started Investing originally appeared on Fool.com.

None of the five Motley Fool contributors have any material interest in any stocks mentioned in this article.The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.