Thread by @BrianFeroldi

The most important investing lessons I've ever learned are counter-intuitive

That’s logical - if the lessons were intuitive, I wouldn’t need to learn them. I would do them naturally.

Here are 7 counter-intuitive investing principles that have made me a better investor:

1/ Don’t haggle

My instinct is to pay the lowest price possible

If a stock is trading at $21, I used to set a limit order for $20.50

Trying to squeeze out every last penny of value

My orders didn’t always fill

I had to try again the next day (at a higher price)

The bigger problem is that haggling caused me to NOT BUY a few mega-winners

Which is FAR MORE costly than slightly overpaying

Think of it this way

If stock checks all your boxes and goes from $20 to $200

does it matter if you got in at $19.56 or $21.25?

If you think a stock has 10x potential, don’t haggle over pennies

Just buy it

2/ It's a great sign if a stock has ALREADY beaten the market

If you study Buffett & Graham (like I did), you train yourself to look for cheap business

I would scan the “all-time low” list for ideas

and look at @TMFStockAdvisor scorecard for the biggest LOSERS

I’ve since learned that:

1⃣Winners tend to keep on winning
2⃣Losers tend to keep on losing

It’s actually a WONDERFUL sign if a company has already beat the market

It means that:

1⃣ The business model is working
2⃣Wall Street recognizes that it is working

I now do far more shopping on the “all-time HIGH” list than the "all-time low" list

and no longer tell myself...

3/ Watch the business, not the stock

My instinct is to focus on share price

Pull up any stock’s data: What’s the first thing you see?

The stock price!

What does the media report on?

Stock prices!

Tons of focus on price, very little focus on business results

I’ve learned that stock prices movements are random

In the short term, they are not correlated to the business at all

In the long-term, they are 100% correlated to the business

I now focus most of my time looking at business results

And very little of my time watching stock prices

4/ The P/E ratio IS NOT universally applicable

When I first learned about P/E ratio, it just made sense

It became the yardstick by which I judged ALL companies

In 2006, the company I was working for adopted @salesforce

We were happy customers, so I checked out $CRM stock

The P/E ratio was over 150, so I passed

Here's what happened since...

I’ve since learned that the P/E ratio IS NOT a universally applicable metric

It's A metric -- not THE ONLY metric that matters

You need to know
1⃣When it’s useful
2⃣When IT SHOULD BE IGNORED

5/ If you’re right 50% of the time, you’re system is WORKING

My instinct was that 50% of stocks beat the market and 50% lose

Therefore, an accuracy rate of 60% was needed to outperform

A @jpmorgan study from 1980-2014 flipped my thinking

It showed that:

✔️Only 36% of stocks beat the market
✔️Only 7% of stocks accounted for nearly ALL the index's gains

This means that the odds of picking a winner are not a coin flip - they are more like a dice roll

A good stock-picking system simply increases your odds of success

So, if 50% of your stocks outperform and 10% are mega-winners, your system is working!

6/ Add at lower VALUATIONS, not just lower PRICES

My instinct is to double down on my losers

If I liked a stock at $20, and the price is now $10, I should buy more, right?

Not necessarily…

Is the BUSINESS better or worse? That's what matters!

I’ve since learned that I shouldn’t try and focus on buying at lower PRICES

I should focus on buying at lower VALUATIONS

Tom Engle calls this strategy “adding at better value points”

Here’s a thread on how to do it, using $MA as an example

https://twitter.com/BrianFeroldi/status/1308780530712940544?s=20

7/ Low Valuation ≠ Undervalued

High Valuation ≠ Overvalued

@morganhousel wrote an eye-opening article in 2013

He looked at the Dow stocks in 1995 and asked: what P/E ratio did you need to pay to earn an 8% CAGR by 2012?

This table summarized the results

The findings:

✔️Many high-valuation stocks were UNDERVALUED
✔️Many low-valuation stocks were OVERVALUED

This article (plus experience) has taught me:

1⃣ High-quality businesses deserve to trade at a premium
2⃣Low-quality businesses deserve to trade at a discount

If you want to learn more about investing,

I teach beginners how to researching investments on my YouTube Channel

youtube.com/c/brianferoldi…

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I regularly tweet about money, investing, and self-improvement

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You may enjoy all the other threads that I’ve written

You can find them here

https://twitter.com/BrianFeroldi/status/1386309937597321218?s=20

To summarize:

1⃣ Don’t haggle
2⃣Find stocks that are already up big
3⃣ Watch the business, not the stock
4⃣ P/E isn't universally applicable
5⃣The odds aren't a coin flip
6⃣ Add at better value points, not just better prices
7⃣ Low Valuation ≠ Undervalued