Stock Investing Level 1: Become a Wealthy Douchebag
Investors adopt many different approaches that offer little or no real prospect of long-term
success and considerable chance of substantial economic loss.
Many are not coherent investment programs at all but instead resemble speculation or
Investors are frequently lured by the prospect of quick and easy gain and fall victim to
the many fads of Wall Street.
My goals in writing this course are twofold.
In the first section I identify many of the
pitfalls that face investors.
By highlighting where so many go wrong, I
hope to help investors learn to avoid these
For the remainder of the course I recommend one particular path for investors to follow—a
Value investing, the strategy of investing
in securities trading at an appreciable discount
from underlying value, has a long history
of delivering excellent investment results
with very limited downside risk.
This course explains the philosophy of value investing and, perhaps more importantly, the
logic behind it in an attempt to demonstrate why it succeeds while other approaches fail.
I have chosen to begin this course, not with a discussion of what value investors do right,
but with an assessment of where other investors go wrong, for many more investors lose their
way along the road to investment success than reach their destination.
It is easy to stray but a continuous effort
to remain disciplined.
Avoiding where others go wrong is an important step in achieving investment success.
In fact, it almost ensures it.
You may be wondering, as several of my friends have, why I would create a course that could
encourage more people to become value investors.
Don’t I run the risk of encouraging increased competition, thereby reducing my own investment
Perhaps, but I do not believe this will happen.
For one thing, value investing is not being
discussed here for the first time.
While I have tried to build the case for it
somewhat differently from my predecessors
and while my precise philosophy may vary from that of other value investors, a number of
these views have been expressed before, notably by Benjamin Graham and David Dodd, who more
than fifty years ago wrote Security Analysis, regarded by many as the bible of value investing.
That single work has illuminated the way for generations of value investors.
More recently Graham wrote The Intelligent Investor, a less academic description of the
Warren Buffett, the chairman of Berkshire
Hathaway, Inc., and a student of Graham, is
regarded as today’s most successful value investor.
He has written countless articles and shareholder and partnership letters that together articulate
his value-investment philosophy coherently and brilliantly.
Investors who have failed to heed such wise counsel are unlikely to listen to me.
The truth is, I am pained by the disastrous
investment results experienced by great numbers
of unsophisticated or undisciplined investors.
If I can persuade just a few of them to avoid dangerous investment strategies and adopt
sound ones that are designed to preserve and maintain their hard-earned capital, I will
If I should have a wider influence on investor behavior, then I would gladly pay the price
of a modest diminution in my own investment returns.
In any event this course alone will not turn
anyone into a successful value investor.
Value investing requires a great deal of hard work, unusually strict discipline, and a long-term
Few are willing and able to devote sufficient time and effort to become value investors,
and only a fraction of those have the proper mind-set to succeed.
This course most certainly does not provide a surefire formula for investment success.
There is, of course, no such formula.
Rather this course is a blueprint that, if
carefully followed, offers a good possibility
of investment success with limited risk.
I believe this is as much as investors can
reasonably hope for.
Ideally this will be considered, not a course about investing, but a course about thinking
Like most eighth-grade algebra students, some investors memorize a few formulas or rules
and superficially appear competent but do not really understand what they are doing.
To achieve long-term success over many financial market and economic cycles, observing a few
rules is not enough.
Too many things change too quickly in the investment world for that approach to succeed.
It is necessary instead to understand the
rationale behind the rules in order to appreciate
why they work when they do and don’t when they don’t.
I could simply assert that value investing
works, but I hope to show you why it works
and why most other approaches do not.
If interplanetary visitors landed on Earth
and examined the workings of our financial
markets and the behavior of financial-market participants, they would no doubt question
the intelligence of the planet’s inhabitants.
Wall Street, the financial marketplace where capital is allocated worldwide, is in many
ways just a gigantic casino.
The recipient of up-front fees on every transaction, Wall Street clearly is more concerned with
the volume of activity than its economic utility.
Pension and endowment funds responsible for the security and enhancement of long-term
retirement, educational, and philanthropic
resources employ investment managers who frenetically
trade long-term securities on a very short-term basis, each trying to outguess and consequently
outperform others doing the same thing.
In addition, hundreds of billions of dollars
are invested in virtual or complete ignorance
of underlying business fundamentals, often using indexing strategies designed to avoid
significant underperformance at the cost of assured mediocrity.
Individual and institutional investors alike
frequently demonstrate an inability to make
long-term investment decisions based on business fundamentals.
There are a number of reasons for this: among them the performance pressures faced by institutional
investors, the compensation structure of Wall Street, and the frenzied atmosphere of the
As a result, investors, particularly institutional investors, become enmeshed in a short-term
relative- performance derby, whereby temporary price fluctuations become the dominant focus.
Relative- performance-oriented investors,
already focused on short-term returns, frequently
are attracted to the latest market fads as
a source of superior relative performance.
The temptation of making a fast buck is great, and many investors find it difficult to fight
Investors are sometimes their own worst enemies.
When prices are generally rising, for example, greed leads investors to speculate, to make
substantial, high-risk bets based upon optimistic predictions, and to focus on return
while ignoring risk.
At the other end of the emotional spectrum, when prices are generally falling, fear of
loss causes investors to focus solely on the possibility of continued price declines to
the exclusion of investment fundamentals.
Regardless of the market environment, many investors seek a formula for success.
The unfortunate reality is that investment
success cannot be captured in a mathematical
equation or a computer program.