OK, now that you know just about everything there is to know about Warren Buffett and his “feminine” temperament, let’s take a minute to recap the lessons we’ve learned from each of the eight feminine investing traits as well as our three “Buffett-esque” principles. Then we’ll talk about how to take all the knowledge we’ve learned so far and apply it to a Foolish investment philosophy.
Female investors tend to:
1. Trade less than men do
• Remember you’re buying a piece of an actual business.
• Take the long view.
• Be patient.
2. Exhibit less overconfidence: men think they know more than they do, while women are more likely to know what they don’t know
• Buffett’s “sphere of understanding” may be different from your own.
• Think about and learn what your own circle of competence covers.
• Stick to it, no matter what.
3. Shun risk more than male investors do
• Insist on an appropriate margin of safety.
• Avoid debt as much as possible.
• Stay within your circle of competence.
• Do your homework before investing overseas.
4. Be less optimistic, and therefore more realistic, than their male counterparts
• Be levelheaded about your investments and the market at large. Learn not to be excited by market swings to the upside or devastated by market drops.
• You’re in charge of Mr. Market. Don’t let him boss you around.
• Quoting Buffett, “When investing, pessimism is your friend, euphoria the enemy.”
5. Put in more time and effort researching possible investments, considering every angle and detail, as well as considering alternate points of view
• Read, read, read.
• Don’t forget about your circle of competence.
• Avoid confirmation bias—seek out information that contradicts your conclusions, not just information that reinforces them.
6. Be more immune to peer pressure and tend to make decisions the same way regardless of who’s watching
• Be willing to be contrarian, as uncomfortable as it may be.
• Take Buffett’s words to heart: “Be greedy when others are fearful, and fearful when others are greedy.”
• Live by your own Inner Scorecard.
7. Learn from their mistakes
• You’re going to make mistakes. We all do. So don’t beat yourself up when you slip up.
• Assess what happened. Did you miss something? Or did market conditions change?
• Think about what you can reasonably do differently in the future. If you bought stock in a company you didn’t truly understand, for example, vow not to do that again.
8. Thanks to good old biology, have less testosterone than men do, making them lesss willing to take extreme risks, which, in turn, could lead to less extreme market cycles.
While not a trait of the female investing temperament, the outcome of this investing style is important. Therefore, remember that female investors produce results that are more consistent and persistent. And in the hedge fund world, female-managed hedge funds outperform comparable male-managed hedge funds, and they don’t suffer from market drops as severely.
• Ignore anyone who tells you throwing darts at a newspaper is the same as intelligent analysis.
• A good defense is just as valuable as a good offense.
• Stick to a system that’s logical and works, and you, too, could build a lengthy and impressive track record.
And our three Buffett-centric principles:
1. Value and cultivate your relationships with people
• A business is only as strong as the people running it.
• Read up on the management of companies you are considering investing in. Look for smart, open, loyal, fair executives you can admire.
• Don’t be afraid to put people before profit; Buffett isn’t.
2. Learn from the masters, but be willing to question them
• The learning never stops, so even after you think you’ve figured out the best way to invest, keep studying.
• Just because someone’s an acknowledged investment guru or master doesn’t mean there isn’t a better way.
• You aren’t committing blasphemy when you question anybody, Warren Buffett included.
3. Be fair and operate in an ethical manner
• You can be good and be rich; one doesn’t preclude the other.
• It’s possible to find companies where employees, shareholders, and customers all win, and those can make for winning investments.
• Look for companies that communicate in an open, honest way. You, as an owner, deserve to be treated this way.
Now that we’ve broken down the qualities and temperament that make Warren Buffett the investor he is, and we’ve discovered the investing traits that female investors tend to share (and use to edge out the boys), what more is there to it? Well, lots actually. The Motley Fool has spent years educating, amusing, and enriching investors all over the world, and while you’re already well on your way to being a successful investor, you’ve still got more to learn. So, let’s jump right in. The first few principles will be familiar to you at this point, but they’re important enough to touch on again.
• Buy a stock, buy a business.
• Buy what you know.
• Long-term buy-to-hold is the way to go.
• Compound interest is a miraculous thing.
• Save to grow.
• Invest now?
• Get your assets allocated.
• Diversify. Yes, diversify.
• What, me sell?
BUY A STOCK, BUY A BUSINESS.
As we learned earlier, when you buy a share of stock, you are investing in an actual business. Keeping this fact in mind helps separate the mere speculators (boo, hiss) from the bona fide investors (wild applause). Consider yourself a business owner, whether you’ve just ponied up for 100 shares of Hershey or 10,000 shares of Target.
The Motley Fool holds this tenet near and dear, and it’s the foundation for our entire investing philosophy, as it is for Buffett. Don’t you forget it, either. You aren’t just typing in three or four random letters into your online broker’s website and then pushing “submit.” You are buying a part of a business, just as if you went out and bought the lemonade stand from those cute kids on the corner (can you believe how much they charge for that stuff?).
Key takeaway: You aren’t buying something abstract when you invest. You’re becoming a business owner.
BUY WHAT YOU KNOW.
We also believe, as does Buffett, in staying within your circle of competence. Another famous investment mind, Peter Lynch, who ran the incredibly successful Magellan Fund for Fidelity for years, popularized the phrase “Buy what you know,” and that works here, too.
Essentially, you want to be able to understand what you’re investing in. It follows behind what we just talked about—if you believe you are buying a piece of an actual business (and you are), then you should be able to explain what that business does, and understand how it makes money. For beginning investors, this often means buying shares of companies that sell products you use or know well. Look around you—there are investment opportunities and possibilities all around.
The danger of going too far afield of what you can reasonably understand raises the chance that you’ll invest in something you can’t adequately follow and feel comfortable owning over the long term. And that’s what this is all about—long-term stock ownership.
Key takeaway: Understand what you’re investing in. It lowers your risk when you do so.
LONG-TERM BUY-TO-HOLD IS THE WAY TO GO.
Speaking of the long term, this is another facet of Buffett’s investing philosophy that we strongly believe in at The Motley Fool. Buying a stock only to sell it days later, or worse, minutes or hours later, does not interest us. That’s a small-f foolish way to invest. When you’re thinking like a business owner, you are thinking long-term.
Individual investors also have a tremendous advantage when it comes to being able to effectively stay put and avoid trading. Unlike mutual funds or big institutional investors, which are constantly dealing with withdrawals and are therefore often forced to sell in order to generate cash, the little guys and gals like us can, instead, afford to hunker down with our stocks, keeping them near and dear for years on end. Don’t let this important advantage pass you by.
Additionally, when you buy and sell more than you should, you rack up trading costs and tax bills. Even supposing you were gifted with an uncanny ability to be a hotshot short-term trader, the bite that those costs would take from your returns would be painful. It’s one of the reasons women tend to show better results than men do (since they trade less than men).
We believe in long-term buy-to-hold. That doesn’t mean you buy stocks and then never look at them ever again. We aren’t suggesting that. But with the proper mindset that you are buying a piece of a business that you will likely own for years, we believe you should instead monitor your investments to keep an eye on them and make sure nothing drastic has changed.
A helpful tip for putting this into practice is to write down all the reasons you bought a stock at the time you bought it. Document, document, document. Think about what factors could lead you to sell, and jot those down, too. It’s inevitable that you will sell stocks in your lifetime. Buffett does it; everyone does it. The important thing is not to do it for the wrong reasons. There will be times when a company’s outlook and circumstances change enough that you decide it’s time to part with your shares, for example. But it can be difficult to remember what exactly compelled you to buy the company in the first place. If you have a record of your thinking, you have a framework to start from.
Check in on your companies at least quarterly. Read up on how they’re doing and assess what’s going on with them versus your documented reasons for buying in the first place. Our goal, hope, and wish, like Buffett’s, is to hold a stock forever, but that doesn’t mean you should completely ignore it once you own it. Your money, your capital, is precious, and it’s up to you to ensure that it’s invested in the best possible places.
Key takeaway: Don’t invest and then never glance your stocks’ way again. Keep up with the business performance of them—but don’t obsess on the stock price. That’s no way to judge a company’s progress.
COMPOUND INTEREST IS A MIRACULOUS THING.
Another reason to be long-term focused is the amazing power of compound interest. Like kudzu or bacteria, compound interest just keeps growing over time. The concept’s not complicated, for something so powerful. When you have money invested and you’re earning a rate of return on it (so, say, your stock portfolio goes up 6 percent a year), and then you think about the length of time you have your money earning that, each and every year the amount you have is growing—so the base amount you have for the following year is even greater!
OK, so maybe that is complicated. Let’s try a table. Let’s assume you started off with $1,200 invested four different ways over a period of years.
| Savings Account (0.5%) | Money Market Fund (2%) | Certificate of Deposit (5%) | Stock Market* (9%) | |
|---|---|---|---|---|
| Initial investment | $1,200 | $1,200 | $1,200 | $ 1,200 |
| 5 years | $1,230 | $1,325 | $1,532 | $ 1,846 |
| 10 years | $1,261 | $1,463 | $1,955 | $ 2,841 |
| 15 years | $1,293 | $1,615 | $2,495 | $ 4,371 |
| 20 years | $1,326 | $1,783 | $3,184 | $ 6,725 |
| 25 years | $1,359 | $1,969 | $4,064 | $10,348 |
| 30 years | $1,394 | $2,174 | $5,186 | $15,921 |
| 35 years | $1,429 | $2,400 | $6,619 | $24,497 |
| 40 years | $1,465 | $2,650 | $8,448 | $37,691 |
| *Based on the stock market’s historical return | ||||
Remember, that’s $1,200 you did nothing else with. You didn’t add any money over the years, and it grew all on its own to $37,691 over 40 years.
(This table brings up another good point—investing in stocks over the long term will bring you a much better return than other vehicles like savings accounts or money market funds. Given that you’re reading a book about investing in the stock market, this probably isn’t news to you, but it’s worth pointing out nonetheless.)
Now let’s look at another scenario that demonstrates the power of compound interest. Let’s say you start with $1,200 in your first year of saving and then each and every year, you add $1,200 to your original stash. Where do you end up now?
| Savings Account (0.5%) | Money Market Fund (2%) | Certificate of Deposit (5%) | Stock Market* (9%) | |
|---|---|---|---|---|
| Initial Investment | $ 1,200 | $ 1,200 | $ 1,200 | $ 1,200 |
| 5 years | $ 6,091 | $ 6,370 | $ 6,962 | $ 7,828 |
| 10 years | $12,335 | $13,402 | $ 15,848 | $ 19,872 |
| 15 years | $ 18,737 | $ 21,167 | $ 27,189 | $ 38,404 |
| 20 years | $ 25,301 | $29,740 | $ 41,663 | $ 66,917 |
| 25 years | $32,030 | $39,205 | $ 60,136 | $ 110,789 |
| 30 years | $38,930 | $49,655 | $ 83,713 | $ 178,290 |
| 35 years | $46,003 | $ 61,193 | $113,804 | $ 282,150 |
| 40 years | $53,256 | $73,932 | $152,208 | $ 441,950 |
| *Based on the stock market’s historical return | ||||
Wooooo, now that’s more like it! And to improve upon that cool $441,950, you could sock away more than $1,200 a year over that period. More than double it to starting with $2,800 a year and adding $2,800 a year and you’re looking at a million bucks after 40 years.
Once you come to appreciate the full power of compound interest, you’ll see why it’s smart to be invested over the long haul. You need time to make compound interest really work for you. The power it has to build and build and build becomes magnified only with time.
Key takeaway: Take advantage of the full power of compound interest by giving your investments time to grow.
SAVE TO GROW.
In order to have money to invest in stocks, and thus begin benefiting from the joys of compounding interest, you’ve got to save some up. And if you’re carrying around credit card debt, like so many Americans (at last check the average credit card debt per person was nearly $5,000), you’re going to need to address that little issue before you start investing. Yes, it can hurt, because we know you’re itching to become tomorrow’s Buffett, but you need to get your financial house in order first.
The reason why is this: The interest rate on your credit card debt is almost certainly higher than the return you could earn in the stock market. You could very well be paying 17 percent interest on your credit card debt while you’re trying to earn 9 percent in the stock market, for instance. That makes no sense. (Note: Consider investing in one of those credit card companies, because those folks are raking it in!) And because just to keep your debt at bay you’re paying out more in interest each month than you’d be making in the market, you’re stagnating or even falling behind overall.
The soundest course of action here is to come up with a plan to pay more than the minimum balance on your debt each and every month until you get rid of that sucker. Then, and only then, should you consider investing in the market. Heck, even if you’re not quite ready to invest on your own, paying off your credit card debt is still a worthy endeavor. That interest will eat you alive, making the things you purchased (did you really need that second pair of Uggs? did you even need that first pair?) cost way more than they should have.
Remember what we learned about Buffett—he’s not a fan of debt. Listen to him. He knows what he’s talking about. Out-of-hand debt can saddle your prosperous financial future, making it so much harder than it has to be.
One final word on savings—once you’ve got your debt situation all squared away (yay, you!), set some money aside in a safe place as an “emergency fund.” Stuff, as they say, happens, and you want to be ready for it when it does. Broken-down cars, home repairs, last-minute flight and tickets to see U2 in Dublin (ahem) . . . all things that are unanticipated and can be pricey. So save some money and keep it handy, just in case.
Key takeaway: There’s some truth to that old saw, “It takes money to make money.” Thing is, you need to make sure your money isn’t being held hostage by credit card interest rates before you can put it to work for you.
INVEST NOW?
OK, so you’ve cleared out any credit card debt, saved enough for an emergency fund (oh, Bono), and have come to love, appreciate, and respect your new best friend, compound interest. You’re ready, you understand you’re buying a piece of an actual business, and you are in this thing for the long haul.
Or are you?
Ask yourself how quickly you’re going to need access to the money you have saved up and want to invest. Looking to buy a house in two years and need this cash for a down payment? Don’t invest it in the stock market, then. Kid going off to get an Ivy League education (or even a junior-college-in-the-next-town-over education) next fall? Don’t invest. Trying to buy the RV of your dreams in a few years? Don’t invest.
Sorry to be so negative, but this one’s important—only invest money in the stock market when you won’t need it for at least five years or more. Remember the nature of Ben Graham’s fabled Mr. Market character? He can be depressed for years, then happy for a couple of months, then sad again. He’s all over the place, this guy. You do not want any money you need in the short term to be at his mercy. Don’t do it.
Over time, the stock market is where it’s at, but the key here is that you have to be committed to letting your money be yanked about by Mr. Market in the short term. If you need that money soon, stick it in a savings account or other less risky vehicle somewhere, like a certificate of deposit or money market fund.
Taking the long view, Mr. Market looks less crazy. The bumps and curves and crying fits (he can be so annoying when he’s like that) all smooth out, but it takes time. For long periods, the stock market really is the best place to be invested. You just have to be ready and able to take the bad along with the good.
Key takeaway: Don’t even think about investing money in the market that you need in less than five years. Seriously, don’t even think about it.
JUST STARTING OUT? LISTEN UP!
“Don’t borrow money. Debt is the four-letter word that can undo a lot of good work. Buffett has said only invest in what you understand. Be sure the company has durable competitive advantages and be sure the management is top-notch. Think for yourself.”1
—Andrew Kilpatrick, author of Of Permanent Value: The Story of Warren Buffett
“Don’t watch CNBC. That’s sort of flip, but the real message is, ‘You have to find your own strategy.’ You can’t copy or react to other people. It’s a very self-analytical process. Focus on what you do well and what your skill set is and don’t worry about what everybody else is doing.”2
—Lisa Rapuano, founder, Lane Five Capital Management
“As a beginning investor, I would say start where you have some kind of comfort zone, some touchstone that makes you think this makes sense to you. Maybe it is buying shares in the local bank, if you have always done your banking there or buying ten shares of Nike because you like Nike’s running shoes and you think it is a good company. Go somewhere where you have some real tangible thought about the company and not, ‘So-and-so said to buy this stock because it is going to go up next month.’ ”3
—Candace King Weir, founder, Paradigm Capital Management
“They say that so many guitar players really burn out because they try to emulate Jimi Hendrix and so many drummers burn out because they try to emulate Neil Peart, and I think that there is something to be said about not trying to be someone else. To being true to yourself and not trying to emulate even someone who is as spectacular as Warren Buffett. He can divide complex fractions in his head. He is really a talent without compare. He is kind of an island unto himself.
“I think a lot of people just really try to be the next Buffett instead of trying to be the first whoever they are. Investing is hard enough without saying, ‘Well, my instinct says X, but Warren Buffett says Y, so I am going to do Y.’ I think that is a very important thing for people who are just starting out.
“My second piece of advice would be to take your time. There is no rush. So many times with beginning investors they get awfully excited about it and before they have studied it for six months, they own 20 different things with 95 percent of their money, and that is scary. It is scary because they might not think it is scary. So take your time, be yourself. That sounds like an after-school special, but it applies.”4
—Bill Mann, portfolio manager, Motley Fool Independence Fund and Motley Fool Great America Fund
GET YOUR ASSETS ALLOCATED.
All right, so you’ve rid yourself of credit card debt, you have your emergency cash safely stashed, and the money you’re investing is money you don’t need access to for five years or more. There’s one additional time-based factor you need to consider, and that’s what’s called your time horizon. Think of it as the time you have stretched out before you to be invested. How much time you have ahead of you determines, in part, how much of your portfolio should be in stocks.
Let’s say you’re fresh out of college and have your first real “grown-up” job. Aside from getting used to being up early every day and dressing up beyond some patterned PJ pants and an “ironic” Saved by the Bell T-shirt, you should also take this opportunity to invest. You have years and years and years of earning potential ahead of you, so make the most of it! You can afford to take more risk than older investors can, which means you should have all of your portfolio (which is likely still humble at this point, but that’s cool—remember the power of compounding!) in stocks. You have the time to put up with the market’s ups and downs, so start investing early to take advantage of your youth.
Or how about someone in her late 30s or early 40s? She’s been working for a good 15–20 years or so, saving and investing along the way. She may have a child or two, so she’s socking money away for their future, as well. Should she still be invested in stocks? You bet. She probably wouldn’t want to have her entire portfolio in risky high-flying growth stocks (such as those in emerging industries like biotechnology) even if she works in the field and can fully understand them. Balancing them out with some safer, bigger companies makes sense. And it probably also makes sense here to start considering asset classes other than equities to better balance her risk. But she should absolutely still be in stocks.
Someone closer to retirement age, or already retired, should start shifting more of their assets to safer, but slower-growing, assets like bonds. You’re going to start needing to count on that money sooner than our fresh-out-of-college kid, so you’re going to want it to seek shelter from Mr. Market’s mania. Still, we don’t believe you should ever be all the way out of stocks. At this point start looking for established dividend-payers. The benefits are twofold: They’re less likely to be volatile, and you’ll get income from your dividends in retirement.
There’s one more important point to think about here, and that involves making sure you can sleep at night. No, we aren’t talking about instituting a nightly snack of milk and cookies (mmmm, peanut butter and chocolate chip). Instead, you need to consider how much risk you can tolerate—how much you can stand to see your stocks go down. Be honest about how much psychological distress you would be in if your stocks dropped 10 percent tomorrow, or 20 percent over the next few weeks, or 40 percent next year (as they actually did in 2008).
As we discussed earlier, all investing involves risk, and it’s inevitable that you will lose money. You need to be as prepared for that reality as possible. Now, if you are able to keep the freakouts to a minimum and more importantly don’t sell, you won’t lock in those losses, but you have to be able to withstand the pressure.
Author William J. Bernstein, in his book The Four Pillars of Investing, provides a useful table for figuring out how much of your portfolio should be in stocks based on how much downside you could tolerate:5
| I can tolerate losing ____% of my portfolio in the course of earning higher returns | Recommended % of portfolio invested in stocks |
|---|---|
| 35% | 80% |
| 30% | 70% |
| 25% | 60% |
| 20% | 50% |
| 15% | 40% |
| 10% | 30% |
| 5% | 20% |
| 0% | 10% |
So if you can’t take losing 20 percent or more of your money, then no more than half of your portfolio should be made up of stocks. Using this as a guide, along with your time horizon, will help you figure out the best way to allocate your assets.
Key takeaway: Knowing how long you’ve got to invest, and how well your stomach and sleep patterns can handle risk, will help you figure out how much of your portfolio to invest in stocks.
DIVERSIFY. YES, DIVERSIFY.
On the issue of diversification we differ from Buffett’s opinion. Whereas Buffett has long believed that you need to own just a few stocks, and own a whole lot of each of them, we believe in spreading things out a bit more. In this way, we tend to be a little more like Peter Lynch or Ben Graham than Buffett.
We’re not suggesting you run out and buy shares of 1,000 companies (that’s how many Lynch left behind in his Magellan Fund once he’d retired!), or even 100. There’d be no way you could keep up with all those companies. But we do believe that a portfolio of at least 15–20 companies reduces the risk that something horrible will happen with one of them that could sink your entire portfolio.
Buffett believes that by concentrating on just a few stocks, versus buying many, you actually reduce your risk because you are more likely to buy stocks you know a lot about and believe in more fully. We still want you to buy companies you understand and know as much as possible about. We just believe that it’s easier to protect your precious capital when you don’t have it sitting in so few places. Things go wrong all the time with companies, or the economy, or some specific industry or segment of the market. Having your money spread out among many investments means that if one of them goes bust, the others should (hopefully) be able to offset it.
One easy way to get instant diversification is something Buffett does strongly advocate, though, and that’s investing in an index fund. An index fund is a mutual fund that exactly follows an index of stocks. So, for example, an index fund that tracks the S&P 500 will include all 500 of the various companies held in the index. When you buy shares in an index fund, it’s like owning a slice of all those companies, and therefore, all those various industries and business types and so forth. You get the benefit of being exposed to many companies in one easy transaction.
Now, the managers of an index fund will not try to “beat the index” or “beat the market.” Instead, their aim is to match it. That may sound like a yawn, but consider the fact that according to Motley Fool research only 42 percent of actively managed funds beat the S&P 500 through the fifteen years ending January 2009. Not only that, but index funds are typically very low cost, which means you save money versus investing in an actively managed fund. So you make more and save more when going with an index fund. For something that only seeks to match the market’s average return, that’s not bad. Average never looked so good, in fact.
We believe you should stick some money in an index fund, in addition to investing in individual stocks. Even if it’s just through your company’s retirement plan (what? you aren’t investing in your 401[k]? what’s wrong with you?), an index fund is the perfect foundation for your entire investment strategy. Buffett thinks so, and so do we.
Key takeaway: Diversification, both through owning 15–20 individual stocks and through owning shares of an index fund, is a very good thing. It helps reduce your risk and protect your portfolio.
WHAT, ME SELL?
We’ve just spent many words and many minutes of your time telling you to never sell, basically. And that’s still great advice. Buffett’s favorite holding period is forever and so is ours.
But the dirty little truth is that sometimes you simply must. It can be painful to say goodbye to a company you’ve taken the time to get to know, but sometimes you just have to. And here are some situations where that makes sense.
First, you will, from time to time, come across better opportunities. Your goal as an investor is to have each and every dollar maximized and invested in the best possible place. If that means selling a current holding, even for a loss, to make that happen, you just have to do it. Sometimes you need to free up money for a better opportunity, and selling something you currently own to raise the cash to do so is your best option.
Even Buffett has had to part with stocks he likes to be able to invest in new opportunities. He did this in 2009 when he sold shares of Johnson & Johnson and Procter & Gamble to raise money for his huge Burlington Northern acquisition.6 There’s no shame in that. Your resources are finite, after all, so do what you must to deploy them efficiently.
Next, you may need to consider selling thanks to changes at a company you’ve invested in. Unfortunately, there’s just no way around it: Businesses change, and sometimes significantly. We could be talking about a major acquisition, a change in management, a shift in the competitive landscape, or a change in the company’s direction or focus. When this happens, incorporate the new information and reevaluate to see if the reasons you bought the company in the first place still hold true. Remember how we talked earlier about writing down the reasons you bought a stock in the first place? That’s where this documentation will come in handy for you. Pull out that raggedy old notebook with SpongeBob SquarePants on the cover to help remind yourself why you bought this company, and to see if things have changed dramatically for it.
When you’re thinking about the company, consider selling if:
• Its ability to crank out profits is damaged or clearly fading.
• Management undergoes significant changes or makes questionable decisions.
• A new competitive threat emerges or competitors perform better than expected.
You should also take into account unfavorable developments in a company’s industry. Here it’s important to delineate between temporary and permanent changes. In a downturn, the financial results of even the best-run companies may suffer. What’s important is how these businesses take advantage of the effects on their industry to improve their competitive position.
The third reason you may consider selling a stock is for valuation reasons. Now, granted, we’re all for long-term buy-to-hold, but sometimes Mr. Market just shows our stock too much love. (Our stock is shy and doesn’t like all that attention!) When that happens, consider selling if the stock price has run up to a point where it no longer reflects the underlying value of the business.
Our fourth reason starts with a whoops. Hey, everyone makes mistakes, as we’ve seen—even Buffett. Sometimes, you’ll just plain miss something. You’ll get something wrong, you’ll be too excited about the heady prospects for the “next big thing,” or you’ll just generally slip up in some other way. It happens. When it does, you should seriously consider selling if it turns out your rationale for buying the stock was flawed, if your valuation was too optimistic, or if you underestimated the risks.
The final reason to think about selling a stock is what it’s doing to your ability to sleep well at night. We talked earlier about how much risk you’re comfortable taking on, and sometimes you can overestimate that. It’s tough to put a dollar value on your peace of mind. If you have an investment whose fate has flipped this way and flopped that way such that it now causes you to lose sleep, that could be a great cue to move your dollars elsewhere. We save and invest to improve our quality of life, after all, not to develop ulcers. Adding insult to injury, stressing about a stock might cause you to lose focus and make rash decisions elsewhere in your portfolio. Remember, there’s no trophy or prize for taking on risk in investing. Stick with what you’re comfy with.7
Key takeaway: Sometimes, you just have to sell a stock you’ve bought. That’s OK, so long as you’re doing it for the right reasons.
A WORLD OF MEN AND WOMEN, INVESTING TOGETHER.
Finally, a word of advice for all of us investors, men and women alike. Let’s take this chance to learn from one another.
For women, you can learn from men to take action, rather than waiting to start investing. We’ve all heard the statistics, right? Women outlive men by 5–10 years and earn less than men do during their working life, so they need to be saving more for their retirement. Not only are women starting out further behind, but we’ve got to make do with less. And our risk-averse nature can mean we often don’t invest as aggressively as we need to. So it is critical that more women take control of their financial futures and start investing on their own. Men are more willing to jump in than we are, and we need to remedy that. We’ve just seen that women are wired for investing success, so take advantage of that fact!
Now, of course, we’re not saying you should start investing and begin trading like a madwoman. But you’ve got to make the moves necessary to get in the investing game. Finding and opening a discount brokerage account isn’t difficult. There are many that offer low minimum balances and cheap trades. You can check out Fool.com’s Broker Center for comparison tables and links to them. Once you find one you like, it takes only minutes online to fill out the forms. Honestly. You’ve no excuse not to do it.
After you open your account, start by buying one share of a stock. Yes, just one. Make it something you’re interested in, a company you know well and can have fun following. Think about consumer brands or retail companies, to start. Handbag company Coach, for instance, has been a stellar performer, even through the recent recessionary times. Or warehouse store giant Costco, which we discussed earlier, is an outstanding company. There are tons of examples all around you. Find one you like—and do it. Take action.
Once you make your move, keep reading everything you can about the company. Track its quarterly results and business performance. Notice how amazing it feels to own a share of a business. It can, and should, be fun!
Now, don’t stop with one. Keep on going. Build your portfolio. Follow your holdings. Remember to keep the proper temperament. And smile. You are an investor. You’ve taken hold of your financial future, and you should be proud of that.
Now, men can learn something from women, too. As we’ve talked about through this entire book, the most important factor in long-term investing success is having the right temperament. And men, while they are likely to take action, are then likely to take too much of it, and sabotage their very chances. Men, trade less. Take less risk. Tone down your overconfidence. It’s affecting your decision making and could possibly even be causing trouble for the financial world at large. You may not be able to rid yourself of testosterone, but try to overcome its win-at-any-cost effects. The market swings and binges of the past will hopefully become less likely in the future, if only men could learn a little something from the fairer sex.
Ladies, you’re not off the hook, though. You can’t just sit back and rest on your good temperament’s laurels. You’ve got to start investing, and putting your excellent temperaments to work for you. After all, while Warren Buffett may not, in fact, be a woman, he does invest like one, as we’ve now seen. You’ve got the natural inclination to follow in his footsteps. And you can build the skills to do so. Don’t waste this opportunity. One day, perhaps we’ll be reading a book about your investing prowess and your name will sit alongside the Oracle’s. It’s possible, but not until you start investing. Make that day today.