Five Reasons Not to Trust Analysts’ Recommendations

Five Reasons Not to Trust Analysts’ Recommendations

“Is there a recommendation to buy stocks in the company?”

“What do the analysts say about it?”

These are the kinds of questions I often hear people ask when they are considering investing in a company.

Most people have blind faith in stock analysts as experts and prefer to check their assessment of a company before doing anything on their own. They have the same faith in the analysts as they have in physicians when dealing with their children’s health.

But stock analysts are not experts in the same way as lawyers or pediatricians.

A stock analyst’s work is linked to a commercial purpose in the bank.

My advice to you is to avoid reading stock analyses from the big financial houses because there are some built-in flaws in the system that make it hard to trust them.

You should instead train your do-it-yourself muscle in conducting your own research and making decisions before you buy shares.

One way you can learn how is by using my 1-page checklist here.

Let’s get to the point. What’s the problem with stock analysts’ recommendations?

There are five…

1. The Bank Makes Money From Fees and Commissions

The analysts are employed by the banks. The banks, of course, make money from the fees you pay every time you buy or sell shares. Or, if you use a stockbroker, from the commission they get.

That means that there is a financial interest in getting you to trade more actively than you would otherwise do. You could say that the research and the recommendations work as appetizers to make you become more active in the market.

The recommendations work like stoplights in traffic – green, yellow… or as they call it, buy, hold, sell – so you feel that you need to keep an eye out and be active.

The analysts and traders in the banks live like fish in symbiosis in a small aquarium. The stockbrokers will try to whet your appetite for a trade by sending you their colleagues’ stock analyses.

2. The Analysts Are Dependent on the Companies They Cover

The companies decide who they want to invite to dinners, meetings, and to special events like their capital market days, which are occasionally held in luxurious surroundings.

I attended a capital market day at a Four Seasons in California for one of the Danish hearing aid companies. The hotel room, the dinner and the party that took place were so extravagant that I still talk about it today.

The companies can choose to cut an analyst off from all that if they don’t like the analysis.

If an analyst is cut off from the company’s communications and invitations, it’s difficult to cover that company in the future.

This makes it almost impossible to make harsh sell-recommendations or any analyses that really expose the company’s weaknesses.

Therefore, the banks’ analysts tend to make more buy than sell recommendations.

3. The Analysts Move Like a Hoard

You often see that recommendations are similar to each other. There will be a dominant trend and a bit of a domino effect where they rub off on each other.

This is because it’s difficult to go against the pack.

If you get it wrong, you are very exposed if you were the only one who held that point of view. You can get fired for that.

If the whole pack is wrong, it’s easier to hide and shrug it off.

4. An Analyst Covers One Industry

 An analyst is specialized. They usually only cover one sector or industry, and that makes it hard for them to have a bird’s eye view on matters.

For example, an analyst might cover pharmaceuticals or the financial sector. The one covering pharmaceuticals will know very little about banks, and vice versa.

This means that an analyst’s recommendation is based on a very narrow perspective.

The analyst does not have an overall view of whether it is a good time at all to invest in bank shares – or whether there are better opportunities in another corner of the market.

5. Analysts Only Cover the Largest Companies

There is a whole undercurrent of companies that are completely ignored by both analysts and the media.

The bank must be able to generate enough revenue from the trade that it makes sense to have an analyst employed to cover the company.

This means that many wonderful companies are ignored and overlooked simply because they are not among the biggest on the stock market.

So What Should You Do?

You have to master the ability to do your own research. You do this by knowing what to look for. 

In my e-book Free Yourself, I teach you the process I use to review a company before I invest.

You can learn to do the same.

Begin with the e-book, and if you want more information, you can join a free webinar, and later on, my intensive value investor course.

Keep an eye on the e-mails to get notified about future webinars and courses.

Download my e-book Free Yourself  here. When you do that, you have the option to get emails from me about future opportunities.

The Top 20 Online Sites For Stock Market Investors

The Top 20 Online Sites For Stock Market Investors

There are a lot of tools available for you as an investor, but it’s easy to get lost on the internet.

This list will help you cut to the chase and find the best sites quicker. 

Here are the 20 best online tools and websites for value investors: 

1. The Company’s Own Investor Relations Site

The first source of information should be the original source, and by that I mean the annual report, quarterly statements, and other information from the company itself.

There should be a link to the subsite for investor relations on the home page.

If you still can’t find it, just google the company’s name + investor relations. 

2. Google 

You should google the company to see what comes up.

There could be awful – but truthful – reports from short sellers (people betting on the stock falling), big insider selling, or some lawsuit that hasn’t been settled yet.

Always, always google the company you are researching. 

3. News Media  

Take a look at the headlines on the major news sites every day.

I check:

Make it a part of your daily routine to check the websites. You don’t have to read a lot of articles from start to finish – this is about getting the big picture. 

4. Reuters 

Reuters.com contains a stock site that can be really useful to get an overview of a company’s development. 

You can use the search function to find the company.

On the “profile” page of the company, you can see things like how many shares there are. You’ll need that for several calculations when you want to figure out what price you would want to pay per share. 

5. Bloomberg

Bloomberg.com is similar to Reuters – they both sell data to the financial sector. 

Bloomberg has a more aggressive paywall on their website though, but you can still use it to look up the numbers of shares outstanding.

6. Insider Monkey 

InsiderMonkey.com is useful for checking if insiders are dumping the stock.

You don’t want to touch something that the insiders are doing a fire sale of.

History has shown us that insiders often try to unload the stock they own before it’s obvious to the public that a company is going bankrupt. 

7. Gurufocus  

Gurufocus.com shows you what the big value investors invest in. 

You can see the portfolio and their latest trades. Just be aware that the investors only have to report their US investments every quarter, so the information is never going to be completely updated. 

8. Dataroma 

Dataroma.com is a more simple version of a value investor tracker.

It includes different investors from Gurufocus, so it’s a nice addition – Li Lu is on Dataroma, but not on Gurufocus. Who wants to miss out on what Li Lu is doing? Charlie Munger trained him, and some people speculate whether he has a future role to play in Berkshire Hathaway.  

Whalewisdom       

Whalewisdom also tracks the big value investors. I like their heatmap.

10. Seeking Alpha 

On Seekingalpha.com you can find a lot of investors’ analysis and stock ideas.

They have a morning briefing podcast called Wall Street Breakfast. You can find Seeking Alpha’s podcasts here.

11. Investopedia

Investopedia.com is for investors what Wikipedia is for normal people.

If you find something in an annual report that you don’t understand, try looking it up on Investopedia before you panic.

12. The Motley Fool  

The Motley Fool, also called Fool.com, is run by two brothers, and it helps you invest through blog posts, podcasts, videos and so on.

It’s possible to receive stock recommendations if you sign up for the paid version.

13. Morningstar 

I use Morningstar.com for researching ETF and other funds. It’s an easy way to look up their performance and costs.

You can also enter and track your portfolio on Morningstar. 

14. Yahoo Finance 

 You can use Yahoo Finance for a lot of stuff, like setting up a stock screener, entering your portfolio, creating a stock alarm, and many other things.

15. Trading View 

 Tradingview.com is great for charting.

It’s got plenty of other functions like a stock screener. If you’re into Bitcoin and other cryptos, you can chart them here too.  

16. Finviz 

On Finviz.com you can chart, build portfolio and stock screeners, get an overview of the news, backtest your latest trading idea, and much more.

17. Market Screener 

Marketscreener.com lets you chart, build a portfolio, a screener – and many of the other features that the two previous financial sites also offer.

You’ll have to test them and see which one suits you the best.

18. Simply Wall Street 

Simply Wall Street is a value investor site that evaluates investments for you.

I get a little confused about the warning signs that they show, so I prefer to do my own analysis, but I see no reason why you can’t get inspired by Simply Wall Street – as long as you go to the original source (the company’s report) and do your own analysis as well. 

19. SEC Edgar 

 The Securities and Exchange Commission’s website Sec.gov contains a lot of information… if you have the patience for the not-so-user-friendly system.

The funds trades are there – which means you can find all the big investors investments and trades.

Be careful though – you might click on something that fills your screen with code language or html.

The SEC communicates in a semi-cryptic language – here are some of the most important form codes to remember:

  • 13F : Funds reports of their investments
  • 10-k : Annual report
  • 10-q : Quarterly statement
  • 4 : Changes in insiders’ ownership

20. Money and Freedom 

 You’re here, aren’t you? It’s worthwhile following this blog for the weekly posts and lists. 

You’ll automatically be signed up for the weekly investment tips if you download the e-book. Which brings me to…

Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.

 

Three Reasons I Want to Invest for Others

Three Reasons I Want to Invest for Others

When I began blogging five years ago, I looked around the investment landscape and noticed how ordinary people gambled with their money.

Back then, the trend was cannabis stocks and small IPOs that didn’t have a chance to really fly.

It made me want to blog about value investing, which can be summarized as a sensible merchant’s approach to investing.

This investment method is more likely to give you a stable return over many years (if you follow the rules and do your groundwork) than if you blindly put your money on fashion stocks and hyped trends.

I have been writing a blog post every week for almost five years (first in Danish and the last two years in English), and since then, it’s amounted to more than 200 posts.

I have hosted webinars and taught value investing and helped many, and I am grateful for every single moment on this journey.

Now I am taking one step further and establishing an investment company together with 20 partners – most of whom are former students.

It is a big step and a big responsibility.

Why am I doing that?

Why not just keep blogging and teaching and investing for myself – which is already giving me a fantastic lifestyle in my adopted country, Portugal?

In this blog post, I’ll tell you what motivates me.

1. I Want to Help Others Achieve a Snowball Effect

Warren Buffett was very motivated to serve his partners.

In the beginning, he invested for family, friends, and neighbors. He was responsible, disciplined, and methodological in his investing style. By investing their savings, he step-by-step changed their destinies. They became very rich, and their children and grandchildren became rich.

Today, he runs a public company (Berkshire Hathaway), but he still refers to his shareholders as “partners” and he prioritizes the ordinary shareholders over other stakeholders.

At the recent annual meeting, he said the most important thing for him and his partner Charlie Munger was not to lose money.

“It would kill us psychologically if we lost some of our partners’ money,” he said.

That says a lot about how important his partners are to him. He is motivated by helping them. It’s really key.

So am I. I want to change my partners’ lives and the lives of their children.

2. I Want to Be a Role Model and Inspire Others

When Warren Buffett is asked what he is most proud of, he doesn’t actually mention his fortune, even though he has done phenomenally well.

He says he is most proud of his role as a teacher.

It’s a little weird, because he’s not actually teaching officially. He has no role at any university – apart from a few lectures here and there over the years.

But he has used his success and track record as a phenomenal investor to lift others and spread knowledge about value investing.

Around 40,000 people from all over the world showed up and gave him a standing ovation at the recent annual meeting. How did this 92-year-old man become such a rock star?

By being a for others. By inspiring.

When Warren Buffett is no longer here, others have to step in and show people that there is a sensible way to invest in stocks.

I would like to help carry that torch.

I hope more people will invest as value investors.

But not only that. That’s another element.

Try googling “hedge fund manager,” click on pictures, and see how many women appear. Virtually none. Then try googling “famous value investor” and see how many women show up. None.

Why? The best answer is probably because there are no women. Women have no one to mirror themselves after. Investment management feels like a closed and locked door to most young women. 

I want to change that. There are so few women in this field, and that needs to change. Women have all the prerequisites to become good investors.

By being a woman who makes a brave decision, I want to inspire the next generation to handle both their own money and – for the chosen few – also other people’s money.

I hope more women will learn to invest for themselves, and I hope more women will make a career in the financial sector.

Role models can change that.

3. I Want to Live My Passion

I think of stock market investing like playing chess.

It is intellectually stimulating to open a 1oK and figure out the investment case.

Sometimes a brief look at the numbers is enough to discard a case. Other times it requires some analysis to reach a yes.

I’m not just talking about numbers and calculations.

I’m talking about thinking strategically and trying to see what will happen to this company in the future.

A value investor thinks more about the company than the stock itself. A good investor thinks 10 years into the future.

The hedge fund manager David Einhorn once said that for him, investing is like a riddle that has to be solved. I can nod to that.

The point is the same whether you call it chess or a riddle: it’s intellectually stimulating and quite fun for some of us.

Now What?

For the time being, I’m very focused on the practical aspects of opening the fund.

There is some preparatory work that must be done before the company can really be launched. But in two weeks, the partners will sign, and then I can invest.

What about the blog and the teaching?

No worries, I will keep blogging once a week – and once a year, I will teach a group of students how to invest like a value investor.

If you want to learn more about value investing, you can download my e-book Free Yourself right here.

 

Bill Ruane’s 4 Guiding Principles to Investing in Stocks

Bill Ruane’s 4 Guiding Principles to Investing in Stocks

How does Bill Ruane – the only investor that Warren Buffett has ever recommended – actually invest?

When Warren Buffett closed his partnership in 1969, he gave his partners two choices.

They could either stay in Berkshire Hathaway, shares that his partnership had purchased, or withdraw cash from the partnership.

For those who chose cash, he recommended that they invest with Sequoia Fund, which Warren Buffett’s former classmate Bill Ruane managed.

Both Sequoia and Bill Ruane were relatively unknown, despite the fact that the fund performed phenomenally.

The fund aimed to beat the S&P index by 4%, and it did much better than that until Bill Ruane’s death in 2005.

The fund invested according to the value investment principles, which are very similar to the approach in my e-book, which you can download here.

In addition to that, Bill Ruane has shared four principles.

The author William Green describes them in the introduction to his recent book, Richer, Wiser, Happier.

What are they?

1. Don’t Borrow Money to Invest

Early in his career, Bill Ruane used leverage to multiply an investment. But when the market turned and crashed, he was hit very hard and had to sell out, and he was almost back to square one.

From that experience, he discovered a painful psychological lesson about investing.

“You don’t act rationally when you’re investing borrowed money.”

Most people think that borrowing money means taking out a loan, but investing on margin will have the same effect.

Most investment accounts let you trade derivatives like options for more than you can cover.

It’s a very stressful situation to discover that you don’t have cash to cover your obligations.

2. Don’t Follow Momentum

Bill Ruane says to be really careful when you see the market going crazy, because people are either in panic or acting on greed and trading certain stocks at unreasonable valuations.

This is his version of the famous Warren Buffett quote, “Be fearful when others are greedy and greedy when others are fearful.”

3. Ignore Market Predictions

A lot of people ask me questions like:

“What do you think will happen in the stock market now? Is it going to turn on Monday?”

Or, “Are we heading into a recession?”

Honestly, I have no clue. Neither does anyone else.

In reality, you need to invest with blinders on.

You need to invest like a horse that focuses on the road in front of it, and you have to avoid getting spooked by passing traffic.

Bill Ruane says, “I firmly believe that nobody knows what the market will do… The important thing is to find an attractive idea and invest in a company that’s cheap.”

Some investors have been able to short and gamble with great success by guessing when the market will turn. The famous investor Bill Ackman shorted the market shortly before the big dip in 2020, and soon after, he plunged back into stocks, betting that it would revert.

He was right, and it was impressive, but in the end predicting the market is based on guesswork.

Others have lost large sums on reading tea leaves.

The most important thing is to focus on finding quality businesses and take them through the check list.

4. Research Well and Focus

Bill Ruane said to invest in a small number of companies that you have researched and analyzed well, so you have informational advantages.

“I try to learn as much as I can about 7-8 good ideas,” he said. And then he plunges in when the price is right.

“If you really find something very cheap, why not put fifteen percent of your money in it?” he said.

However, this advice only applies to those who do the groundwork, get their butt in the chair, and analyze a company.

For the average private investor, index funds may be the best idea. “Most people will be better off with index funds,” Bill Ruane said.

But for those who want to do a little extra to beat the market, it’s a good practice to be thorough and concentrated.

“I don’t know anybody who can really do a good job investing in a lot of stocks except Peter Lynch,” Bill Ruane said.

Bill Ruane was not afraid to put 35% of the fund’s money in a single company like Berkshire Hathaway.

Learn and Be Curious

The writer William Green, who interviewed Bill Ruane in 2001, made his own conclusion based on his conversation with Bill Ruane.

He writes that good investors are intellectual mavericks who are not afraid of defying conventional wisdom.

They think rationally, rigorously, and objectively.

They gather knowledge and always work on improving their way of thinking.

You should do the same.

Read about how others invest. Examine not only the companies, but how the world works.

Be curious.

You can examine my way of investing by reading my e-book, Free Yourself, which you can download right here.

 

 

The 12 Investing Books that Made Michael Burry

The 12 Investing Books that Made Michael Burry

Michael Burry, who became famous as an investor when he shorted subprime before the financial crisis, a story which was dramatized in The Big Short, is not a trained economist, and he has never gone to business school.

He is, on the contrary, a trained doctor.

Everything he has learned about stocks and economics, he has learned on his own by reading and investing, and it has made him a phenomenal investor.

The other day, he shared a picture of his favorite investing books on Twitter (N.B. the picture in this blog post is of my own bookshelf, as I don’t have the rights to use Michael Burry’s picture. You can see his tweet here.).

In this blog post, I will review the books that are on his bookshelf.

1. Securities Analysis by Benjamin Graham

But of course.

This is the bible.

Benjamin Graham went through the crash of 1929 as a portfolio manager.

In 1930, he thought the worst was over and borrowed money – on margin – to invest. He thought he was smart about it and buying at the bottom of a dip, but his fund suffered a loss of 70%.

He outperformed the market, which in the same period fell 80%, but who cares about details like that when you’re suffering: a 70% decline is dramatic and hard to make a comeback from. This meant, among other things, that Ben Graham did not receive any salary from his fund for five years.

That experience led Benjamin Graham – who in addition to running his investment fund also taught classes at Columbia University – to develop a special investment strategy, which today we call value investing.

Securities Analysis is the first and the most.

You can find it here.

He later wrote The Intelligent Investor, which is a slightly more readable version. You can find it here.

2. You Can Be a Stock Market Genius by Joel Greenblatt

There are different kinds of value investors.

Joel Greenblatt is a quantitative value investor.

What do I mean by that?

The quantitative fund managers invest according to certain metrics and key figures, and they invest automatically in a lot of companies.

The qualitative do the opposite. They handpick companies, analyze them carefully as whole businesses and only invest in a few companies at a time. Warren Buffett belongs to this category of investors (and so do I).

With investments in over 1,000 companies, it’s clear that Joel Greenblatt belongs to the quantitative kind (prioritizing automation and quantity over depth and quality).

If you want to know more about that strategy, he is the most well-known living proponent of the method (I say living because Benjamin Graham also invested this way).

You can find You Can Be a Stock Market Genius here.

He has also written The Little Book that Still Beats the Market, which you can find here. It is written for children in an easy-to-understand language.

3. The Making of an American Capitalist by Roger Lowenstein

Michael Burry has repeatedly said that it was Lowenstein’s biography of Buffett that got him on the path of value investing.

This week’s tweet also leads with a tribute to Lowenstein:

“The Making of an American Capitalist by Roger Lowenstein impressed upon me that Buffett is unique, and so must any investor be. Other books on my shelf.”

It’s a really good book. My own is full of handwritten comments, and I still look up stuff in it (for this blog post I looked up how much Benjamin Graham lost after 1929). You learn a lot about investing and Buffett’s style of investing from reading it.

You can find Lowenstein’s book about Warren Buffett here.

4. When Genius Failed by Roger Lowenstein

Roger Lowenstein describes the success and failure of the hedge fund Long-Term Capital Management in this book.

At one point, Warren Buffett actually tried to buy Long-Term Capital Management, which is narrated in Lowenstein’s other book above.

I haven’t read it yet, but I intend to, so not much to say about it yet.

You can find Lowenstein’s book on Long-Term Capital here.

5. All the Devils Are Here by Bethany McLean and Joe Nocera

If you liked The Big Short, this might be a book for you.

It’s about the financial crisis and what led to it.

Bethany McLean likes digging in the dirt. She has also written an eminent book about Enron, which you can find here.

Why should we spend time on the things in history that went wrong, like the financial crisis and Enron? You could argue that those things are over.

But they’re interesting to look at because we want to figure how to avoid them and how to navigate.

I have gone through a long list of bankrupt and fraudulent companies to see if there are any detectable red flags before companies collapse.

Those warnings signs can make a very important checklist that you go through before investing.

Obviously, we want a good return. To get a good return, there is one thing we must be able to steer clear of: the frauds and the bankruptcies. As Warren Buffett says: Rule No. 1 is, never lose money. Rule No. 2 is, remember rule No. 1.

You can find All the Devils Are Here here.

 6. Atlas Shrugged by Ayn Rand

This is actually a fiction book from 1957.

Apparently, it describes a scenario very similar the financial crisis, and therefore the book has made a comeback.

I haven’t read it, but I’m curious about. It’s on my summer reading list now.

You can find it here.

7. Collateralized Debt Obligations & Structured Finance by Janet Tavakoli

With the subtitle New Developments in Cash & Synthetic Securitization.

It’s probably one of the books that helped Michael Burry when he shorted subprime before the financial crisis.

You can find it here.

8. Credit Derivatives by Janet Tavakoli

With the subtitle A Guide to Instruments and Applications.

Michael Burry’s version seems to be the one from 1998. You can find it here.

Janet Tavakoli has also published an updated edition, which you can find here.

9. Structured Credit Products by Moorad Choudhry.

It’s another one of those book that gave Michael Burry specialized knowledge that made it possible for him to see the bigger picture before the financial crisis.  

You can find it here.

10. Three Collections of Buffet’s Shareholder Letters

It’s really nice to see what a big fanboy Michael Burry actually is.

He has all of Buffett’s letters in black leather books. There they stand on the bookshelf, like a priest’s favorite versions of the Bible.

He has three titles:

  • Buffett Partnership Letters 1957-1970
  • Berkshire Hathaway Letters 1977-1990
  • Berkshire Hathaway Letters 1991-2001.

I can’t find the versions that Michael Burry has, but rest assured that you can find these letters online for free.

You can also purchase a collection that runs from 1965-2021 in Kindle version here for less than $4.

I have to admit, I have the Kindle version and I swear by using an e-reader. I have far more books in e-book format than in physical format. The e-reader is easy to travel with (I almost always travel only with hand luggage), and you can read in bed without turning on lights.

If it’s a theory-heavy book, I prefer to have it in a physical format so I can write and underline, and later pull it out and look at my notes. On the other hand, I always miss it when I’m traveling and can’t access it. Some books I have in both versions: physical and e-book.

Like I said: I have Buffett’s letters in e-format, but I’m envious of Burry’s delicious leather-bound editions. 

Warren Buffett’s letters are a kind of highly esteemed bible for any of us.

11. Where Keynes Went Wrong by Hunter Lewis

The book is a discussion of whether Keynes’s financial instruments are still relevant.

I have not read it, but you can do so once you have ordered it here.

12. Financial Warnings by Charles Mulford

How can you detect the warning signs on fraudulent companies?

I love stuff like that, and this book from 1956 is now on my wish list. Unfortunately, it’s difficult to find. Let me know if you find it.

Who would not want to steer clear of the future Enron and Lehman Brothers? I would definitely like to read Financial Warnings, even though it was written over half a century ago.

You can see the book – but not buy it – here.

A Short Seller’s Books

What do I see when I skim Burry’s bookshelf?

There is no doubt that Michael Burry is a real value investor – a true fanboy.

I also see a mind with a focus on disasters and fault detection.

There is a lot of focus on the financial crisis, crashing, cheating and not much focus on how to spot a wonderful company (I would have liked to see at least one book on competitive advantages – or what about Philip Fisher’s classic Common Stocks and Uncommon Profits, which is about asking good questions to find good companies).

These are the books of a highly skilled short seller with one glass eye and one sharp eye on spotting problems.

Don’t forget to read my free e-book that explains my whole investing process – including my favorite way to calculate what a company is worth. You can get it here.

 

7 Ways to Stomach the Volatility in the Market

7 Ways to Stomach the Volatility in the Market

Stocks are diving, and when you read the business news, your eyes stop on words like “collapse,” “crash,” and “blood-red.”

You feel a sting of anxiety in your stomach when you read the headlines or visit your online bank – which confirms that yes, your stocks and shares are diving too.

How do you remain calm?

To be a successful investor, you have to avoid the natural human instinct to follow the herd.

When stocks plummet, your natural tendency is going to be to want to sell, and when the stock market is going up, your natural tendency is going to be to want to buy.

In bubbles, you should be a seller, not a buyer. In busts, you should be a buyer.

You have to have the discipline to stomach the volatility of the stock market.

Here are seven key ways to develop the strength to go against the herd.

1. Be Financially Secure

First of all, you have to have some savings.

You’ve got to feel comfortable that you have enough money in the bank that you won’t need what you’ve invested for many years to come.

Some people think it’s a shame not to invest every penny that they have. In their world, cash not invested is a waste.

If that’s your thinking, I suggest you look at it this way instead: your cash savings are buying you something very valuable and specific, and that’s peace of mind and the ability to stomach market volatility. You should have at least two types of savings:

  1. A) An emergency account for a car repair or a new fridge. This should be at least 5,000 USD that are always available.
  1. B) A security savings of either three months’ salary or six months’ expenses. This should also be ready in cash. Apart from giving you peace of mind about the stock market, it will also make it easier for you to make some bold career moves and set boundaries at work.

2. Don’t Leverage 

Don’t invest with borrowed money.

Most people know not to take out an expensive bank loan and invest that money or speculate with it.

But there is a different way of borrowing money that is not so obvious to the naked eye. Many platforms let you invest with leverage – almost without you noticing it: it’s called a margin account. Avoid this. You should never invest more than you have.

Investing with leverage has destroyed many good investors, even good value investors who were peers of Warren Buffett.

Call your brokerage platform to make sure that you’re only investing your own money if you’re not sure.

Some more complex financial products contain leverage, but if you are just selling and buying stocks, you are safe.

3. Don’t Get Spooked by the Market

Just because something goes down in value after you buy it, it doesn’t mean you’ve made an investing mistake.

Keep your focus on the long-term prospect.

The stock market moves up and down all the time.

In the short term it’s a voting machine, whereas in the long term it’s a weighing machine.

It’s affected by all kinds of events in the world, and few of these events have anything to do with the business of the company that you are invested in. This is just the nature of volatility. But don’t worry, if your company is sound and has some competitive advantages, the stock price will straighten itself out in the long run.

If it’s any consolation, Warren Buffett has also invested in companies only to see the stock price drop further. One example is The Washington Post, which he invested in during the 1970s. More than a year after he initially invested in the newspaper, the stock price was down 25 percent.

This investment later turned into a profitable one. Four decades later, Buffett exited the position (the original investment of $10 million) in a tax-free swap worth more than $1 billion.

4. Research Your Companies

Don’t buy a stock because someone in a podcast predicted high returns and a glorious future for the company.

Research the companies you invest in. Analyze it the way you would if you were buying the entire company.

  • Make sure it’s a business you understand.
  • Make sure you like the management.
  • Make sure the company has some kind of competitive advantage.
  • Make sure the company doesn’t have too much debt.

It’s a good idea to use some kind of checklist. You can borrow mine here.

5. Pay a Reasonable Price

The price of the stock should be reasonable compared with the earnings of the company.

I usually say “buy it when it’s cheap,” but I fear that many people will think a stock is cheap if it has fallen from a recent high, and that isn’t necessarily the case.

You really have to look at the value in the company and compare the stock price to that.

Let’s go back to The Washington Post for a moment. Warren Buffett had calculated that it was priced at 25 percent of the intrinsic value before investing in it. That’s like buying one dollar for 25 cents. That it fell to 20 cents on the dollar does not make the original investment bad. It means you might want to consider buying some more since it’s an even better investment now.

What if they have no earnings? Don’t invest in it then.

Companies with no earnings or negative earnings are too risky to invest in.

6. Distract Yourself

If you’ve followed the first five points and still feel uneasy, there is only one thing left to do: something else.

The time has come to distract yourself and entertain yourself with other things.

Whether it’s meeting up with a good friend, playing a match of tennis, hiking in nature, playing Monopoly with your kids, watching a show on Netflix, or just concentrating on your work, do it if it can take your mind off worrying about stocks.

If you’ve done all the right things, you can relax and enjoy life – even if the stock market is raging. Leave the fidgeting with the sell button to others.

7. The Very Last Resort: Outsource It

If you find it hard to distract yourself and have a hard time staying away from the panic button (selling at a loss), you may want to consider letting others invest for you.

 As Warren Buffett says, investing doesn’t take a high IQ – it takes a calm attitude.

 You may be smart and informed, but if you are nervous as a leaf in the wind, it’s going to be difficult for you to make wise investment decisions because the herd reaction can get you galloping.

 Outsourcing the investment work is a solution to this. One method may be to invest the same amount each month in passive index funds, but this method doesn’t have much to do with value investing.

 There are several funds worldwide with a value investing purpose. One easy option could be to buy shares in Berkshire Hathaway, but just as with any other public stock, you have to make sure that stock price is fair compared to the intrinsic value. Even the most wonderful company can become a horrible investment if the stocks are bought at an inflated level.

I’m currently launching a smaller investment firm based in Denmark called Grünbaum Value Invest. It’s a simple partnership modeled on Warren Buffett’s first partnership. If you are curious about it, you are welcome to reach out to me.

 How do you know if the price of the stock is reasonable? If you want to learn how Warren Buffett calculates the value of companies, you are welcome to download my free e-book here.