Welcome back to the second installment of our series on responsible investing. In this continuation, we’ll delve further into the foundational principles that underpin sound investment strategies. From scrutinizing historical stock performance records to avoiding emotional entanglements in trading, we’ll explore additional insights and tactics to enhance your investment acumen.

1. Warning Signs in Stock Performance Records

If a stock’s performance record skips over the year 2008, despite being listed before that time, it’s cause for suspicion. Likewise, if stock records begin in 2008, it warrants scrutiny. This is because 2008 marked the onset of the subprime mortgage crisis, leading to a significant market downturn. The omission of this year’s data could be viewed as an attempt to manipulate statistical stock performance. Additionally, periods such as the Great Depression, major recessions, or market crashes should also be examined carefully. Conversely, overly lengthy periods can also be problematic. For instance, if stock performance is tracked from the early 20th century, it might seem like there are no underperforming companies. However, excessively long periods can lead to issues of overfitting. As with the following advice, managers are generally not to be trusted. Remember, no one else will make money for you with your own money.

2. Charlie Munger’s Evaluation of Fund Managers

While there are successful fund managers, they are few and far between. Finding them is akin to finding a needle in a haystack.

3. Investing in Index Funds

If you opt to invest in index funds, it’s advisable to choose funds that cover the entire market rather than those focused on specific countries, sectors, commodities, or leveraged/inverse funds. Referring to the principles of John Bogle, the founder of the original index fund, can be helpful in this regard.

4. The Nature of Stocks versus Bonds, Currencies, and Commodities

Stocks offer dividends, while bonds offer interest. However, currencies and commodities lack such income streams, leading to speculative trading. It’s recommended that only professional traders access currency and commodity markets. In reality, the lower volatility of currency and commodity markets compared to stocks means it’s often harder for non-professional traders to make profits.

5. Irrational Behavior in the Stock Market

Stock prices fluctuate constantly, influenced by market conditions, economic factors, interest rates, and stock price changes. This constant flux perpetuates the message of “don’t just stand there, do something.” Consequently, many individuals engage in irrational behavior.

6. Psychological Errors Commonly Encountered in Stock Investing

Reference this article for insights into psychological errors commonly experienced by investors. Additionally, exploring the field of behavioral psychology can provide valuable knowledge. While it doesn’t offer definitive answers, studying why mainstream economics may not apply to stocks or understanding the causes of psychological biases can be beneficial.

7. Avoid Emotional Involvement

Similar to the preceding point, approach stock investing as an intellectual endeavor. Just as you likely don’t experience euphoria or despair every minute, every hour, or every second over your monthly salary, avoid becoming emotionally entangled in stock trading. If you feel overwhelmed by emotions or a sense of loss in stock investing, consider whether you might be suffering from stock addiction or gambling addiction, and take a break from trading. During such times, there’s a high likelihood of incurring losses if you continue trading.