Simple, yet profound. The longer I live and the (hopefully) wiser I become, the more I realize that most of the important concepts in life boil down to just a few simple ideas. Simple, yet very very important.
Ideas like, “Spend less than you make”, “Optimize for the common case” or “Invest for the long term by buying and holding”. These are exceedingly simple concepts… yet when they’re practiced for an entire lifetime these ideas can lead to incredible financial success.
Today I’d like to propose another simple yet profound idea. One that applies to many potential areas in life:
Succeeding in life isn’t so much about consistently making “winning moves” but it’s actually about avoiding the big blunders. The obvious mistakes.
You’re probably thinking, “That’s way too simple. Successful people work really hard for all that success! Just avoiding missteps isn’t going to lead to success, right?”
On a certain level, you’re right. Hard work can lead to career success, but even successful people can get loaded-up on cocaine and drive their Ferrari into a cement wall at 120 mph. I don’t consider that a successful life by any means…
No, hard work and career success won’t necessarily keep you out of the obvious trip-ups in life. The mistakes I’m talking about can totally destroy a life:
- Drugs, cigarettes, and alcohol – Substance addiction is no joke. Illegal drugs are bad on a whole number of levels, but some drugs are legal and get abused all the time. Not only does this hurt your physical and mental health, but it hurts your pocketbook too!
- Eating poorly — Obviously eating a bunch of crap and gaining weight is terrible for your health. Once your health has deteriorated, it’s also very hard to get back into a healthy state. Putting good healthy food into your mouth should be an absolute ‘no brainer’.
- Not getting enough exercise — This one goes along with eating poorly. Humans are not meant to be sedentary. Sitting around and not getting any exercise is obviously going to be very bad for your long term health.
- Marrying the wrong spouse — Marrying the wrong person in life can cause a huge amount of mental pain and suffering. To make matters worse, if you get a divorce that can be a lot of financial pain too.
- Reckless Driving — Did you know that there are over 90 fatal car accidents per day in the United States? Every year over 2 million Americans are permanently injured in car accidents. With statistics like that, it’s obvious we need to be extremely careful when driving. Driving is one of the most dangerous things we do on a regular basis. Slow down and stay safe people.
- Keeping the wrong friends — It’s been said that people are the “average of the five people you spend the most time with”. It’s obvious that keeping good friends can make you a better person. Keeping bad friends might get you put in jail. Choose wisely, because who you call a friend matters.
- Over-spending — Getting into debt because you have a spending problem is clearly very bad news. Your financial health will suffer if your spending takes precedence over getting debt under control.
See what I mean? These are giant mistakes that can destroy (or severely cripple) a successful life no matter how much money you make. These mistakes are obvious, yet they trip up loads of people every day.
When my kids get old enough, I hope they can study this list and try to avoid the big mistakes. As a parent, I don’t need my kids to be super successful high earners. I could care less about how much money they make or how successful they are in their chosen career…
I just want them to grow up to be good people that steer clear of trouble and stay healthy.
Avoiding Obvious Mistakes When Investing
Avoiding the obvious mistakes has clear benefits when it comes to your lifestyle, but there’s also big benefits to this strategy when investing too.
To quote Charlie Munger, “It is remarkable how much long-term advantage people like us have gotten by trying to be consistently not stupid, instead of trying to be very intelligent.”
He’s absolutely right. You can make a ton of money just by investing in low/no fee index funds and not trying to be smart. There’s absolutely no need to be a genius to do decent as an investor. You can get decent returns without great intelligence. All you have to do is avoid making the really stupid mistakes — The mistakes that lead to a permanent loss of capital.
What are some of these obvious mistakes in investing?
Investing in high fee funds or funds with a load — This one has been repeated to death on the internet, but paying high fees is bad. Even today I see people still investing in high-fee funds or funds with a front-load, so this mistake bears further repeating.
Using leverage — While leverage can definitely boost investing returns, it can also destroy investors when things go the wrong way. Rarely is leverage worth the additional risk taken.
Investing in things you don’t understand — One of the biggest mistakes investors can make is investing in stocks, bond, or other investments they don’t really understand. For example, I have a friend that owns shares in Tesla and he’s never looked at a 10k or 10q. That’s a huge risk because he doesn’t understand the business. He just “drank the Tesla Kool-Aid” and thinks it’s a great investment.
Overly large dividend payout ratios — This is another obvious blunder I see repeated all the time. Investors “chase yield” and invest in companies with very high payout ratios. Then, along comes an “economic blip” (like a recession) that derails that high dividend paying company. Suddenly they don’t have enough cash to pay dividends. The company either ends up selling assets, cutting the dividend, or going deeper into debt to just to keep paying it. Any of those options is going to be a bad outcome for investors.
Trusting the wrong business partner — This mistake I see more frequently with small businesses owners or real estate investors. The cost of those businesses is quite high, so they often go into the investment with a partner. People don’t always agree about how to run a business however, and partnerships can go bad. Things can go south pretty quickly if you put your trust in the wrong person. Be careful who you do business with.
Investing in industries undergoing rapid change — Obviously investing in a dying industry isn’t a very good idea. Malls and retail stores are a perfect example of this right now. We know people are spending less and less time in malls and doing more shopping online, but people still try to invest in these things. There can be times when it works out, but more often than not “turnarounds just don’t turn around”.
Chasing Momentum / Chasing Growth — Here’s a blunder that doesn’t get nearly enough criticism, because it’s a little less obvious. Investors try to buy into hot stocks or fast growing businesses, hoping to catch some of that sweet out-performance. What they forget is that business return is a product of the price you pay, and fast growing stocks sell at huge premiums. When investors put money into these stocks, what they’re really doing is investing in “The Great Fool Theory“. In other words, they’re hoping a greater fool will come along and pay more than they did.
The Biggest Mistake To Make
There’s plenty of mistakes to make in life, but probably the biggest mistake you can possibly make is not learning from your mistakes — repeating the same blunder over and over. Learning from your mistakes is key (assuming you can recover from them). This is why I’ve long recommended curating filters to become a better investor. Every time you make a mistake investing it should become a new filter that helps you avoid making that same mistake all over again.
It’s a simple strategy, but very effective when applied over an entire lifetime. So simple that almost everyone misses it.
The world is so laser focused on success, maybe what it should really focus on is just avoiding major mistakes. Most people are so interested in “winning” that they miss the obvious inversion strategy of “not losing”.
Steer clear of the trouble spots for a lifetime and your bound to do pretty well. Life is hard enough as it is. Don’t let the easy stuff trip you up.