Warren Buffett

Our Top 5 Favorite Investment Related Quotes

Below we have listed five of our favorite investment related quotes. These are quotes from the foremost experts in the world of trading an investing. After each quote, we’ll explain why this agrees with our philosophy towards investing, and how it can benefit you. keep in mind that many of these will be counter to the short-term trader’s mindset.

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

Markets are cyclical. They don’t continue to go down forever, and they don’t continue to go up forever. When the herd is running fast in a particular direction, you need to make sure you don’t get trampled in the stampede when the herd reverses course.

The Efficient Market Hypothesis states that people will by more of something when the price falls, and buy less of it as the price increases. This may true in consumerism when talking about televisions and refrigerators, but the exact opposite is true when it comes to stocks.

Alan Greenspan referred to it as irrational exuberance. We refer to it as the herd mentality. The average person is more likely to buy shares of a stock that have increased in value, than they are to buy shares of a stock that have decreased in value.

While there is plenty of money to be made by owning stocks that are making a series of higher highs, you need to protect your profits and be ready to exit a trade quickly when the price action starts to flounder.

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

We’re not saying you should empty your savings accounts and invest 100% of your assets into the stock market. The point of this quote is that if you aren’t willing to accept a certain degree of risk, you won’t be able to reap above average returns. Nothing ventured, nothing gained.

Risk is not a dirty word. Taking risk in your investment portfolio is how real wealth is created. Having said that, risk also needs to be managed. Don’t enter a trade that doesn’t have a strong risk/reward ratio, and make sure that you protect your downside should the trade go against you.

“The four most dangerous words in investing are: ‘this time it’s different.'” – Sir John Templeton

Follow market trends and history. Don’t fall into the trap of believing that this particular time will be any different. It’s never different because markets are cyclical. Once you accept this truth, you can plan your trade entrances and exits much more effectively.

Bubbles have been a part of every market since the beginning of free market trading. Those who believe that what they are experiencing isn’t a bubble, but a new paradigm, are the ones who get hurt the most when the bubble bursts.

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

You can’t accurately predict the future, and neither can anybody else. You should always base your decisions on real facts and analysis rather than risky, speculative forecasts. Trading on hunches, opinions, beliefs, or instincts is a recipe for failure.

When you are analyzing a particular investment, you are looking at the past, whereas when you buy a stock, you are looking into the future. Many traders get caught up in the notion that past performance is not indicative of future results. While this statement is true, evaluating the past is much more likely to give you an accurate prediction of the future than pure speculation. Do your analysis, and manage your trades with the knowledge that your analysis may be flawed.

“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett

It’s hard to write about great investment quotes and not mention Warren Buffett more than once.

For new investors, a high level of diversification can be a portfolio saver. Diversification can protect you from suffering major losses on a bad investment choice. However, once you’ve gained some investment experience and understand the value of hedges and protective trades, you can adjust your portfolio accordingly, take larger positions, and have a more concentrated portfolio.

The problem with diversification for an experienced trader is that owning a broad range of investments in different classes and sectors ultimately means you don’t own the best of the best. A highly diversified portfolio will always contain individual positions that are huge under-performers. So, while diversification can protect the novice trader, it will hinder the experienced trader.