Lessons Learned From Three Decades of Investing

All investors will experience their share of success and failure. The market doesn’t play favorites. So what separates the best investors from the rest? It’s the lessons we learn along the way and how we apply them going forward.

Following are some of my top takeaways from three decades of investing:

'When the facts change, I change my mind'

This quote, often attributed to John Maynard Keynes (though he likely didn’t say it), is a reminder of the importance of adapting to changing circumstances. For example, in January the consensus forecast was that the Fed would cut rates six times during the year. That forecast was predicated by an economic outlook featuring slower growth, rising unemployment and inflation falling closer to the Fed’s 2% target.

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However, the facts supporting the start-of-year consensus changed, with economic growth, employment and inflation all meaningfully higher than expected, making it less likely that the Fed would cut interest rates aggressively in 2024.

Some investors were faster to adapt to the changing environment, revising their forecasts and portfolio positioning accordingly. Investors who stubbornly clung to the hope of rate cuts were slower to adjust their expectations, with negative portfolio consequences.

Reaching for yield is usually a bad idea

In a meeting early in my career, a corporate CFO questioned the logic of risking his career to seek a quarter-percent higher yield on the company’s short-term investments. That simply stated advice has stayed with me, as I’ve seen investors lose money by taking unnecessary risks to gain a relatively small amount of incremental yield. The low-yield environment made it particularly tempting to reach for yield in the years following the global financial crisis.

Higher-yielding investments may have a portfolio role, but investors should do their homework to assess the viability of bond coupon payments and principal repayment before investing. Equity investors seeking dividend yield should do similar work, evaluating the sustainability of current dividend payments (which are not guaranteed) and the valuation for the stock and the prospects for growth.

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Don’t blindly follow someone else's investment ideas

I worked for a firm in the 1990s that invested in many privatizations of government-owned companies outside the United States. In reviewing a privatization of a telecommunications company, we identified multiple investment red flags, including shortcomings in corporate governance structure, problematic related-party transactions and an unstable regulatory framework.

The firm’s analyst proposing the investment dismissed our concerns, citing the involvement of a prominent investor as validation of the privatization opportunity. The prominent investor, however, had more favorable deal terms, including a far lower acquisition price and preferential liquidity terms. The prominent investor took far less of a loss a few years later when the stock price of the telecommunication company collapsed.

It can be tempting to invest based on cocktail party chatter, memes or social media posts, but the odds of sustainable investment success are low for investors who blindly follow others.

It pays to think about what could go wrong

Most investors focus on the positives when researching a new investment idea, creating a thesis around what they expect to happen with the stock. I’ve spoken with legendary investors who balanced the inherent optimism of that approach with the use of an investment “pre-mortem” before buying new stocks.

In a pre-mortem, the investor assumes that at a predetermined future date, an investment will have become a failure. The investor uses the pre-mortem to identify reasons why the decision might not work, which can help identify potential flaws in the investment thesis or future signals that would reveal signs of trouble for the investment.

Investors who allow for the possibility of failure will be better equipped to avoid making bad investments, or to more quickly identify when an investment isn’t working and should be sold.

Seek those who have advice on how to be a better investor

The airwaves and bookshelves are filled with advisors discussing what investors should think, or sharing tales of investment success. Investors may learn more from those who offer advice on how to become a better investor. My thinking about investments has been influenced by thought leaders such as Howard Marks, Warren Buffett, Daniel Kahneman, Michael Mauboussin, Seth Klarman and Philip Tetlock. Seeking insight into how to invest is likely a more productive endeavor than listening to war stories about someone’s recent investment win.

Investing is a continuous learning process, and this is by no means a complete list. That being said, I hope these lessons from my own experiences provide some practical guideposts as you proceed through your investment journey.

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