The Worst Standalone Advice Beginner Investors Get

I often hear people say:

Buy shares in a great company and you will make money!

This is extremely dangerous investment advice. Outstanding returns will not come from simply buying shares in the world’s best performing companies.

 

Why?

  1. You should never forget that your returns will depend on the price at which the bought the shares– the discount to the shares’ market value. You can buy shares in the best-performing company in the world, but if you overpaid for its shares, you will not beat the market. Equally, you can make a lot of money from a mediocre (even insolvent!) company if you bought its shares at a low enough price.
  2. High-cap stocks are often more efficient. There is a much lower chance that you will find a bargain in high-cap markets, buying well-known stocks.

 

Please remember that investors tend to have an overly optimistic mentality in long bull market runs. As legendary investor Howard Marks describes in his book “The Most Important Thing”: in the 70s, investors thought it was acceptable to buy a bunch of blue chip stocks (see the Nifty Fifty) with prices at around fifty times P/E. They didn’t base their investment decisions on realistic valuations. Needless to say, these stocks massively underperformed over time and the market crashed in 1980. If you had invested in these stocks in the 70s, you would have lost most of your money by 1982. Don’t be the one to fall into this trap.

Please never tell friends/family and beginner investors to simply buy shares in great companies without doing the work by evaluating and monitoring the company’s share price and the company’s performance. If they aren’t willing to do that, investing in a low-cost index fund is perfectly acceptable.