“Of 1,028 stock recommendations made by the typical brokerage firm during the first quarter of 2001 (the top of the bull market), only 7 were 'sell' recommendations.”
Many analysts cover companies with which their employers, such as investment banks, do business. This should not officially affect their recommendations, but it does happen. Also, by giving “sell” recommendations, analysts could find it more difficult to access the insiders of these companies, which would make their jobs more difficult. As a result, there is bias toward “buy” or “hold” recommendations. As an investor, you need to remember that when looking at recommendations or reading analyst reports. There are signs that something is going wrong, though. For example, a stock can be downgraded from “buy” to “hold.” Too many “hold” recommendations may also mean something may not be right. In addition, look at the trends in recommendations.
“The mistakes we make as investors is when the market is going up, we think it’s going to go up forever. When the market goes down, we think it’s going to go down forever. Neither of those things actually happens. It doesn’t do anything forever.”
Overall, investors tend to have short memories. They forget large market declines and think this time is different. So “irrational exuberance” (as Alan Greenspan once pointed out) sets in, which results in many individuals buying at the market tops at the time when smart money exits. On the other side, in times of market declines, some investors panic and sell their shares cheaply, only to find out that the market has recovered. There are cycles composed of tops and bottoms, and that is the lesson.
“The miracle of compounding returns is overwhelmed by the tyranny of compounding costs.”
When it comes to the power of compounding (which is growth based on growth), it makes a huge difference. Here, even an extra 1% compounded over many years is significant. So, by saving that 1% from the costs, this extra 1% growth is achieved. When it comes to index funds, these can save even more than that in comparison to actively managed mutual funds.
“Ask yourself: Am I an investor, or am I a speculator? An investor is a person who owns business and holds it forever and enjoys the returns that U.S. businesses, and to some extent global businesses, have earned since the beginning of time. Speculation is betting on price. Speculation has no place in the portfolio or the kit of the typical investor.”
Too many people treat investing as a gamble. It shouldn’t be one. Investing needs to be treated as a business. Speculation is something else. Day trading, for instance, is speculation. But, successful traders bet on probabilities when entering trades. Those who buy and sell on impulse, or trade on tips, are gamblers. And they fail. Then, they say that investing is bad. But, they have never invested. They didn’t even speculate. They gambled. Essentially, they played a slot machine.
“Reversion to the mean is the iron rule of the financial markets.”
Investors often like to jump into top performing stocks or mutual funds. At times, this may be a good idea as there are well-managed companies and superior fund managers. However, this isn’t always the best idea. For example, some sector-specific funds have done well because the sector was hot. But, this could lead to high valuations in that sector, which then can result in future poor performance as much of the run up has been done. The past performance doesn’t always guarantee future results. What goes up fast is likely to come down. What falls too quickly can also recover. And not a single manager can constantly outperform all others (with very rare exceptions such as Warren Buffet). There is reversion to the average.
John Bogle is considered the father of index investing. Back in 1970s, he founded Vanguard Company and soon after offered the first ever index mutual fund to the public. Now, Vanguard is one of the biggest mutual fund companies.
Index funds have lower costs than regular mutual funds
Find out here how this investor made millions in the market. All verified track record!
Mr. Bogle has launched an index fund because he came to the idea that an index mutual fund could outperform many actively managed funds in the long term due to its lower management costs. The idea behind an index fund is to mimic an underlying index such as S&P 500.
We have selected some of the finest investment quotes made by John Bogle and added comments. One way to learn about investing is by listening to what great investors have said about it.
“Fund investors are confident that they can easily select superior fund managers. They are wrong.”
The fact is that a majority of mutual fund managers underperforms the market. This means that they don’t earn the fees they charge. As a result, investors started going for passive index funds, and later for ETFs, which are low cost alternatives to actively managed mutual funds.
“In the long run, investing is not about markets at all. Investing is about enjoying the returns earned by businesses.”
In the long run, your stock investments will do as well as the companies you own. Therefore, treat investing as your own business since by buying stocks for investment you’re actually buying stakes in various businesses. You become a shareholder, a partial owner of these businesses.
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“Investing is not nearly as difficult as it looks. Successful investing involves doing a few things right and avoiding serious mistakes.”
Too many investors seek to get rich quickly and, as a result, fall for scams. These often come in the forms of “once-in-a-lifetime” opportunities. For example, there are lots of stock promoters who promote useless shares. Buying quality at a discount is what leads to great success, but only the best investors can do it. However, by diversifying and investing over many years in such investment vehicles as index funds, fortunes can accumulate. The reason there are fund managers is to make things easier for investors.
What’s important is selecting a professional and trustworthy investment management company. Things don’t need to be complicated. Persistence and continuous efforts in adding to investments count. There are even tax-advantaged accounts such as 401(k)s and IRAs in the United States, which make it easier and tax effective to invest for millions of people.
“Index funds eliminate the risks of individual stocks, market sectors, and manager selection. Only stock market risk remains.”
One of the benefits of mutual funds is diversification. By buying shares even in a single fund, investors have their money invested into multiple companies. This eliminates company specific risk. By buying a broad index fund, such as Vanguard Global Balanced Fund, investors get additional benefits of diversification beyond a specific sector, country, and asset class.