The best thing about investing? The lessons are relatively simple and universal.
The worst thing?
Watching people ignore them.
Over. And over. And over again.
Itâs not for nothing that Sir John Templeton famously remarked:
âThe four most expensive words in the English language are âthis time it’s differentâ.â
He is, of course, 100% right.
Iâve seen it so often over the past 25 or so years of investing.
And it had long been proven true even before I started with this caper.
There are so many examples, I frankly donât know where to start.
Actually, I do.
Greed.
And the human ability for self-delusion.
The first, egged on by the second, are the root of most problems in investing.
It truly is nuts.
There never has been a system more likely to help you get rich slowly than the stock market.
And yet, so impatient are we that weâll happily bypass that likelihood for the chance of getting rich more quickly⦠or blowing up our finances in the process.
Just think about that for a second.
Small, regular investments in the ASX or US stock market have compounded to extraordinary wealth over the long term.
But too many of us are prepared to risk that astoundingly great outcome because we want more, or want it more quickly.
Itâs madness.
And yet⦠thatâs precisely whatâs happening on the stock market, most days.
Generously, itâs a gross misunderstanding of the incredible possibilities of slow, steady wealth creation.
More realistically⦠it’s greed.
The lotto win.
The fear that it could take too long.
The chance that your cabbie, neighbour or brother-in-law might be getting richer, when youâre not.
See, history doesnât repeat⦠but it does rhyme.
How many times have people told Warren Buffett he was âpast itâ?
Certainly in 1999, after three or four years of dot.com exuberance.
And then? An almighty tech crash.
And again in recent years, as free money and investor exuberance sent tech stock share prices sky high, again.
And then?
Exactly.
Or those companies relying on regular globs of cash to fund their business models. Like, say, Deliveroo, which has pulled out of Australia, citing an almost-certain view that it couldnât reach profitability, given the competitive landscape.
âNever put yourself in a position where youâre relying on the kindness of strangersâ, to paraphrase Buffett.
And yet, when the money was flowing and share prices soaring, who could resist the Siren song?
Another one?
âInflation is deadâ, they said.
Enough said.
Economies move in cycles.
Portfolios grow exponentially, thanks to the benefits of compounding.
And yet, people think linearly.
Itâs not our fault, at least at a basic level.
Our evolutionary brains are relative infants, on a universal timescale.
Compounding is an alien concept to our biology.
But hereâs the other thing.
Modern humans are caught between two worlds, and, investing-wise, at least, weâre stuck.
We donât yet instinctively âgetâ compounding, but most of us are living urban lives that rob us of the visceral reality of cycles.
Ask farmers about cycles.
They live these things.
Seasons, for a start.
Regular La Nina and El Nino, for another.
But those of us whoâve lived only urban and suburban lives could be forgiven for thinking that strawberries, tomatoes and oranges are year-round crops, such is their supermarket availability.
Still, maybe itâs not just that.
After all, the Tulip bubble, where single bulbs were selling for the price of houses, was a particularly agrarian phenomenon.
Whatever the cause, we forget cycles all-too regularly, and at our financial peril.
To again quote Buffett, âIf past history was all there was to the game, the richest people would be librariansâ.
But heâs talking here about stock picking, not an understanding of markets themselves.
An understanding and appreciation of economic and stock market history is vital.
Because, and this shouldnât be a surprise, thereâs little thatâs really ânewâ in investing.
Sure, the examples are different. And businesses and business models evolve.
But the principles that underpin business and investing?
Theyâre as old as the hills.
History is littered with examples of speculation.
Exuberance.
Impatience.
Soaring â and crashing â share prices.
Poorly executed takeovers.
Businesses running out of cash.
Commodity cycles.
Interest rate cycles.
Inflation cycles.
For the young people (and/or new investors) reading this, I canât be any more clear.
This has all happened before.
My wife, an educator and teacher, tells the story of every yearâs Year 9 class trying the same tricks in the classroom.
See, theyâve just thought of them.
And, revelling in their own discoveries, try them out on the teachers.
Who⦠have seen exactly the same thing from every Year 9 class for years.
The kids canât believe theyâve been caught. It was such a brilliant plan.
And so?
And so the choice is yours.
You can be the Year 9 kids, telling yourself youâve discovered the magic formula.
Or you can be like the teachers â learning from the experience of every other Year 9 class in years gone by.
Sure, they might come up with a different variation, but the game is still the same.
It truly never is different this time.
In two ways.
First, arrogance reigns supreme. There is an uncomfortably large number of people who, even as they read this, are discounting my words. They know better.
And second, cycles will be cycles.
Economic cycles.
Share price cycles.
Confidence cycles.
And so, despite my best efforts, itâll happen again. And again.
Which means, you have a choice.
You can be someone who decides to do the right things, the simple things, and the important things.
In short, you can be Aesopâs tortoise.
Or, you can be the hare â fast, keen, arrogant, reckless and greedy.
You know how this ends, right?
Invest accordingly.
Fool on!
The post Cycles are back… appeared first on The Motley Fool Australia.
When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.* Scott just revealed what he believes could be the “five best ASX stocks” for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now
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Motley Fool contributor Scott Phillips has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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