Let’s imagine a time not so long ago (before this finance series began). What would your first step be if you wanted to learn about investing?
If you were to search for “best books on investing,” you’d likely encounter the same title repeatedly. Go ahead and test this out; ask a friend knowledgeable about finance for their top book recommendation.
Chances are, you’ll hear about “The Intelligent Investor: The Definitive Book On Value Investing” by Benjamin Graham.
Why is this book so popular? Because it’s often endorsed by notable investors like Warren Buffett, who attributes his success to its teachings.
However, just because it worked for Buffett doesn’t mean it will work for everyone.
The Limitations of Anecdotes
Buffett’s story is compelling, but it’s essential to remember the broader context of his achievements:
- His IQ is likely above 150.
- He began saving and selling at a young age.
- He purchased his first stock at just 11 years old.
- His college finance professor was Benjamin Graham himself.
- His business partner is the incredibly astute Charlie Munger.
These factors, along with many others discussed in his biography “The Snowball,” contribute to his success.
To assume that reading Graham’s book will transform you into Warren Buffett is as far-fetched as believing that wearing Nike soccer cleats will turn you into Cristiano Ronaldo. It doesn’t work that way.
Don’t Try to “Invest Like a Pro”
Why focus on Graham and Buffett? Because they are quintessential examples of why it’s unwise to think imitating a “pro” will yield the same results.
What Defines a “Pro” Investor?
A pro is someone who consistently outperforms the market—those featured on magazine covers, hailed as superstars in their field.
Here’s a simple chart illustrating the landscape of returns in investing:
When trying to beat the market, many investors typically receive lower returns or even lose money due to fees and poor decision-making.
On average, the market yields approximately 7% annually. That’s why I advocate investing in index funds; by doing so, you’ll likely outperform the majority of individual investors.
However, a select few investors manage to beat the market consistently over time. Notable names include Warren Buffett, Ray Dalio, and Peter Lynch, among others. They represent the pinnacle of investing prowess.
Five Reasons Not to Imitate the Pros
- Speculating is a Zero-Sum Game
While many may disagree, reflecting on this is crucial. In speculative investing, the stock market functions as a zero-sum game.
When you purchase a stock, someone else is selling it. If your decision to buy is correct, then the seller’s choice to sell was a mistake.
When only a few investors outperform the market, the rest of us are generally facing inferior returns.
As Ray Dalio cautions, “There is a world game going on, and only a handful actually make money, taking chips from players who aren’t as skilled.”
- Diverse Strategies Among the Pros
A quick study of successful investors reveals that they employ vastly different strategies. This reinforces the point that believing one book will provide you the secret to market success is a misconception.
You often only see the success while missing the countless individuals who attempted to replicate those methods but failed.
- Experience and Hours Invested
Take note that figures like Warren Buffett and Ray Dalio have been immersed in investing since childhood. They’ve honed their skills over decades, embodying Conor McGregor’s idea that success comes from hard work and obsession, not mere talent.
For example, Jim Paul reminds us, “You’re not going to beat the market. Competing in the markets is more difficult than winning in the Olympics.”
- Unique Advantages
Tim Ferriss identifies key advantages that top investors possess:
- Informational Advantage: Access to exclusive information.
- Analytical Advantage: Superior data interpretation skills.
- Behavioral Advantage: The ability to manage emotions effectively when making investment decisions.
If you lack one or more of these advantages, you’re at a disadvantage compared to seasoned pros.
- Maybe They’re Just Lucky?
Luck can play a significant role in major financial success. Nassim Taleb exemplifies this thought in his book “Fooled by Randomness,” using a hypothetical scenario where 10,000 investment managers risk their capital in a fair game.
As luck would have it, only a select few might achieve long-term success purely by chance, while many others fall by the wayside.
Strategies You Can Implement
Instead of trying to emulate the pros, here are five practical strategies to help you navigate your investment journey—strategies that can help you outperform a vast majority of investors:
- Invest in Index Funds
- Buy More During Market Dips
- Practice Tax Efficiency
- Diversify Your Portfolio
- Manage Your Mindset
And that’s all for today!
Key Takeaways
Today, you learned:
- The folly of attempting to invest like the pros.
- The characteristics that define pro investors.
- The actionable strategies that you can adopt to improve your investing approach.
Thank you for reading!
Let me know if you need any more modifications or additional content!