Wall Street columnist Jason Zweig once remarked that his job is to essentially write the same thing 50 to 100 times a year, but in a manner that keeps it fresh for his readers. The reason, as Zweig points out, is that while markets are in a constant state of flux, the big ideas seldom change.
“..while people need good advice, what they want is advice that sounds good. The advice that sounds the best in the short run is always the most dangerous in the long run. Everyone wants the secret, the key, the roadmap to the primrose path that leads to El Dorado: the magical low-risk, high-return investment that can double your money in no time. Everyone wants to chase the returns of whatever has been hottest and to shun whatever has gone cold. Most financial journalism, like most of Wall Street itself, is dedicated to a basic principle of marketing: When the ducks quack, feed ‘em.”
So what are some of the big ideas? For me, the following would have to be up there.
Opportunity cost: Your capital is finite. Concentrate on your best ideas.
Volatility is not risk: Risk is the chance of a permanent loss of capital. You can have low and predictable gains, or erratic but high returns. You can’t have both.
Time is money: the more distant the cash flows, the less valuable they are. They’re also far less certain. It’s good to have blue sky potential, but don’t invest on that alone.
Trees don’t grow to the sky: No investment is worth infinity. Even the best quality investments can disappoint if you overpay, so always keen an eye on value.
Compounding: You get it. If you find a compounding machine, make your allocation and get the hell out of the way.
Low time preference: The best gains are made over many years. Only those with the patience to let things unfold will capture them.
Investing is probabilistic: You’re going to make a lot of bad investments. Get used to it; it’s unavoidable. Only the average matters.
While the temptation to chase the latest hot trend or to abandon a strategy during a downturn can be strong, it is those who remain disciplined and focused on the long-term who ultimately reap the greatest rewards.
By understanding the opportunity cost of each investment decision, recognizing the difference between volatility and true risk, valuing the time value of money, avoiding the trap of overvaluation, harnessing the power of compounding, cultivating a low time preference, and accepting the probabilistic nature of investing, investors can build a solid foundation for financial success.
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