The Intelligent Investor - Tips #2

The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)

While continuing my reading, I stumbled on some nuggets of wisdom that I thought I'd share.

1) Past performance does not indicate future success.

2) Be careful with high growth stocks. They have huge growth expectations which they WILL FAIL to meet at some time.

Some quotes from the book/commentary:

"Great expectations lead to great disappointment if they are not met; a failure to meed moderate expectations leads to a much milder reaction. Thus, one of the biggest risks in owning growth stocks is not that their growth will stop, but merely that it will slow down. And in the long run, that is not merely a risk, but a virtual certainty."

...
"Most investors simply buy a fund that has been going up fast, on the assumption that it will keep on going. And why not? Psychologists have shown that humans have an inborn tendency to believe that the long run can be predicted from even a short series of outcomes. What's more, we know from our own experience that some plumbers are far better than others, that some baseball players are much more likely to hit home runs, that our favorite restaurant serves consistently superior food, and that smart kids get consistently good grades. Skill and brains and hard work are recognized, rewarded- and consistently repeated- all around us. So, if a fund beats the market, our intuition tells us to expect it to keep right on outperforming.

Unfortunately, in the financial markets, luck is more important than skill. If a manager happens to be in the right corner of the market at the just the right time, he will look brillant-but all too often, what was hot suddenly goes cold and the manager's IQ seems to shrivel by 50 points."

....

"You can get ripped off easier by a dude with a pen than you can by a dude with a gun. -Bo Diddley"

Link to the book on amazon.com:
The Intelligent Investor: The Definitive Book on Value Investing. A Book of Practical Counsel (Revised Edition)