The 10 most important lessons James Grant learned in finance…

by Nate

1. The key to successful investing is having everyone agree with you — LATERThe most popular investment of the day is rarely the best investment. If you want to know what’s popular, look no further than the front page of your favored business journal… Or just tune in at your next cocktail party.

2. You aren’t good with money. Because humans aren’t good with money. We buy high and sell low because it’s what comes naturally. It’s difficult to control emotions. It’s more difficult when money is involved.

3. Everything about investing is cyclical… prices, valuations, enthusiasms. And this will never change. The greatest investors develop a sense of when markets have reached euphoric levels. And of when fear is crippling reason.

4. You can’t predict the future. Nor can the guy who claims he can.

You can, however, see how the crowd is handicapping the future. Observing the odds, you can make better choices.

5. Every good idea gets driven into the ground like a tomato stake. Exchange Traded Funds (ETFs) were a great idea. They allowed investors diversified exposure to a number of markets for minimal fees.

Today, ETFs account for more than 23% of all U.S. trading volume with a total market value over $3 trillion. And the ETF market is forecasted to hit $25 trillion globally by 2025.

And what happens when everyone rushes for the exits?

6. Markets are not perfectly efficient. Because the people who operate them aren’t perfectly reasonable. The debate over efficient markets has raged since the birth of public markets.

7. Patience is the highest yielding asset. Charlie Munger, Warren Buffett’s longtime partner in Berkshire Hathaway, explained the importance of patience this way:

How did Berkshire’s track record happen? If you were an observer, you’d see that Warren [Buffett] did most of it sitting on his ass and reading. If you want to be an outlier in achievement, just sit on your ass and read most of your life.

8. Never stand in line to buy anything. In January 1980, at the peak of the Great Inflation of the Jimmy Carter era, a line snaked out of the doors of a lower Manhattan coin dealer. The people in that queue were waiting to buy gold at what proved to be a generational high, $850 an ounce. I was in that queue. I’ve made plenty of mistakes since then. But that particular mistake I’ve subsequently avoided.

9. Leverage is like chocolate cake. Just a little bit, please. Markets will always correct. They corrected after the Dutch tulip mania in 1630s. And they corrected after the subprime mortgage debacle in 2007. What do corrections correct? They correct the errors of a boom.

And when markets correct, they cause the most amount of financial pain to the greatest possible number of people.

10. “Don’t overestimate the courage you will have if things go against you.”

“Consider all the facts – meditate on them. Don’t let what you want to happen influence your judgement.”

“Do your own thinking. Don’t let your emotions enter into it. Keep out of any environment that may affect your acting on your own reason.”

These final three items, which I’ve included as a single lesson, are in quotation marks because I borrowed them from the late Bernard M. Baruch – one of the greatest investors who ever lived.

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