Black Edge
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Learn to not suck at investing
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"Low IQ, high energy." Robert Downey Jr.'s verdict on Wall Street after visiting in 1993:
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Dave Ramsey on investing $150,000 outside retirement accounts without getting crushed by taxes: A caller named Steve asked Dave how to invest $150,000 outside of retirement accounts. Dave's answer revealed a tax strategy most investors overlook. Dave starts with his two foundational rules: "Rule number one is you don't want to do it unless you understand it. Rule number two is you put somebody in your life that has the heart of a teacher." Then he gets into the real problem with investing outside retirement accounts: "I personally invest, Steve, inside my retirement accounts in four types of mutual funds: Growth, growth in income, aggressive growth and international. Outside of retirement accounts, those funds all create taxes each year as they grow. That's a problem." His solution? Low turnover ratio mutual funds. Dave explains the concept using a rental property analogy: "If you buy a rental house for $200,000 and it goes up in value to $300,000 and you still own it, you do not owe taxes on that 100,000 in growth because you've not sold the house… So, you've got capital gains growth, but you don't have any taxes because you've not sold it." The same principle applies to stocks: "If a share of stock goes from $50 to $70, you don't pay taxes on that $20 gain until you sell it. Same is true inside a mutual fund." Here's where the turnover ratio comes in: "The turnover ratio is when they sell the stock inside the mutual fund. If it has a 90% turnover ratio, that means almost all the stocks get sold every year. And so all those gains are going to be taxable every year. If they have a 5% turnover ratio, which is a low turnover ratio, that means you're not going to pay taxes on the increase in value until you sell the mutual fund cuz they aren't selling the stocks inside the mutual funds hardly at all." The target number Dave gives: "You want an under 10% turnover ratio. Because anything that turns over the gain is they're going to send you a tax bill on the gain every year." Here's a shortened version: The takeaway: Outside of retirement accounts, how often a fund trades matters more than what it holds. High-turnover funds create a tax bill every year. Low-turnover funds let your money compound quietly until you sell.
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Warren Buffett gets asked the question "why doesn't everyone do what you do?" His response is simple and profound:
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Howard Marks offers a contrarian view on investing: "The investors who never finish in the top quartile are better than the ones who do." He tells the story of a Midwest pension fund manager named Dave Van Bencotton who, for 14 years straight, finished every single year between the 27th and 47th percentile. Howard contrasts Dave with a New York fund manager who had a catastrophic year — a value firm that bet heavily on banks, collapsed in performance, and then justified it publicly with this logic: "If you want to be in the top 5% of money managers, you have to be willing to be in the bottom 5%." Howard's reaction was immediate: "I like the first guy better." That juxtaposition became the title of his very first investment memo, written October 12th, 1990: The Route to Performance. Most investors visualise the normal distribution and think the same way: shoot for the upper tail, swing for the fences, find the massive winners. Oaktree's approach is the opposite. "Cut off the bottom tail." Remove terrible from the equation. If your range of outcomes consists of fabulous, excellent, very good, good, not so good, and so-so — but never terrible — you'll be one of the best performers over time. "Not after one year. Somebody else will swing for the fences and hit it exactly right and will be lionized for her performance that one year." "Who can do it for 30 years?" The lesson is to understand that in compounding systems, avoiding catastrophe is more powerful than hitting a home run.
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Warren Buffett on deciding whether to hold a declining stock:
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Warren Buffett's 3 rules for success: When asked for his top advice, Buffett doesn't mention stock picks or valuation models. He starts with something simple: "By far the best investment you can make is in yourself." His first rule? Learn to communicate. "If they just learn to communicate better, both in writing and in person, they increase their value at least 50%." "If you can't communicate, it's like winking at a girl in the dark. Nothing happens." His second rule is about protecting your mind and body. Imagine you're given one car for life. You'd fix every scratch and maintain it perfectly. "You get exactly one mind and one body in this world, and you can't start taking care of it when you're 50." His third rule: Choose who you surround yourself with. "You want to associate with people that are better than you are. You'll go in the direction of the people that you associate with." And the most important choice? Your spouse. "You want to pick a spouse that's better than you are, and hope they don't figure it out too fast." Three simple rules from one of the greatest investors alive.
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Peter Lynch on how the simple strategy the average investor can use to beat 99% of the market:
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