Thread by @BrianFeroldi

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

That’s logical - if they were intuitive, I would do them naturally.

Here are 7 counter-intuitive investing lessons I had to learn the hard way:

1: Don’t haggle over pennies

My instinct is to pay the lowest price possible when I buy.

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.

Problem 1 was my orders didn’t fill. I had to try again often at a higher price.

Problem 2 was that haggling caused me to NOT buy a few great stocks because I anchored to the lower price.

Some of those great stocks took off without me.

It's counter-intuitive to not haggle over pennies.

But think of it this way:

If a stock goes from $20 -> $100, does it matter if you got in at $19.56 or $21.25?

2: Look for stocks that have already beaten the market.

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

I used to scan the “all-time low” list for ideas and avoided stocks trading at 52-week highs.

I’ve learned the hard way that winning stocks tend to keep on winning.

And losing stocks tend to keep on losing.

I now see it as a GREAT sign if a company has already beaten the market.

My favorite investing thesis has become:

After all, if you bought:

$AMZN in 2010
$AAPL in 2012
$NFLX in 2015
$TSLA in 2017

You’ve done incredibly well, even though those stocks were ALREADY up huge.

3: Watch the business, not the stock.

My instinct is to focus on the share price.

What is happening with the stock TODAY?

Pull up any stock’s data; what’s the first thing you see? Price!

What does the media report on? Price!

I've learned the hard way that short-term movements are random. They are unpredictable and often do not correlate to the business at all.

But, in the long-term, they are 100% correlated to the business.

It's counter-intuitive to ignore the stock price and focus on the business results, but that's the smarter way to invest.

4: The P/E ratio IS NOT universally applicable.

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

It became the yardstick I used to judge every company’s valuation.

Yet, the P/E ratio has been a false indicator SO. MANY. TIMES.

It told me to avoid "expensive" stocks - that then crushed the market.

It told me to buy "cheap" stocks -- that then fell hard.

It's counter-intuitive that you can't use the P/E ratio on all stocks at all times.

I learned the hard way you need to know WHEN the P/E ratio is useful and when it’s not.

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 to it.

The same odds as a coin flip.

Therefore, an accuracy rate ~60% was needed to outperform.

A JP Morgan study from 1980-2014 changed my mind. It showed:

-> ~36% of stocks beat the market
-> ~10% 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 a dice roll!

It's counter-intuitive that you can outperform the market when less than 50% of your stocks outperform.

But that's how the stock market works!

6: Add at lower VALUATIONS, not just lower PRICES.

My instinct was to double down on my losers.

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

Well, not necessarily…

The question to ask: is the BUSINESS stronger or weaker?

If the stock is up 10%, but earnings are up 20%, the stock could be a BETTER buy, even though the price is higher.

Unfortunately, the inverse is also true.

It's counter-intuitive that a stock price can be higher and a better investment at the same time.

I've learned the hard way to buy at better valuations, not just better prices.

7: Low Valuation ≠ Undervalued & High Valuation ≠ Overvalued

Morgan Housel 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 back then to earn an 8% return?

This table summarizes the results:

The findings:

Many high-valuation stocks were UNDERVALUED.

Many low-valuation stocks were OVERVALUED.

It's counter-intuitive that a high-valuation stock can be better than a low-valuation one.

I've learned the hard way that high-quality businesses deserve to trade at a premium and low-quality businesses deserve to trade at a discount.

Many of these counter-intuitive lessons have one word in common:

Valuation.

Which is the trickiest part of stock investing!

I'm hosting a free webinar tomorow (7/19) that will help to demystify valuation:

Interested? RSVP here (for free): https://t.co/y2j1I7Dzfflu.ma/6dvg3qo6

To summarize:

1: Don’t haggle
2: Find stocks that are already market beaters
3: Watch the business, not the stock
4: Know when to use P/E ratio
5: Know the odds
6: Add at better value points, not better prices
7: High Valuation ≠ Overvalued & Low Valuation ≠ Undervalued

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