Some of our recommended investment strategies for beginners are to focus on finding a steady, middle-of-the-road approach, and learn how to spot and recognize recurring patterns that rarely work in your favour
History always tries to repeat itself, but never quite succeeds. That’s why it’s important to appreciate the recurring patterns that do exist in the world of investing.
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In 1895, French writer George Polti published The 36 dramatic situations. This short work of nonfiction lays out the essential elements of 36 dramatic situations that provide the framework of plays and novels down through history.
For example, here’s how Polti describes dramatic situation No. 5:
punishment; a fugitive
the fugitive flees punishment for a misunderstood conflict. Example: Les Misérables
Here’s No. 7
Falling prey to cruelty/misfortune
an unfortunate; a master or a misfortune
The unfortunate suffers from misfortune and/or at the hands of the master. Example:Job (biblical figure)
Here’s No. 28:
Obstacles to love
two Lovers; an Obstacle
Two Lovers face an Obstacle together. Example: Romeo and Juliet
Polti believed these situations could be found in, and in fact formed the basis of, all stories. His work points out examples from playwrights of ancient Greece and Rome, and shows how later writers—Shakespeare, Moliere, Victor Hugo and Charles Dickens—used the same structures in their own creations. More recent updates of Polti’s work show how these classic situations turn up in films such as The Wizard of Oz, Superman, The Fellowship of the Ring, The Shining, and video games such as Super Mario Brothers.
Something like this also happens in the world of investment. I suspect you could write a book or a PhD thesis around the concept of “The 36 (or 12, or 57 or whatever) Financial Drama Situations.” Here’s our nominee for the top of the list:
Financial Drama Situation No. 1
A stagnant industrial or political environment; a new scientific or political discovery;
Investors recognize the potential of the discovery; they flock to invest in it; fortunes are made by early market entrants, but no one knows how soon the party will end
This financial-drama situation describes the Internet stock mania of the late 1990s, the emerging-markets investing mania of the early 1990s, the transistor-stock mania of the 1960s, and the many major and minor manias that go back to the South Sea bubble and the Dutch tulip boom.
We suspect it also applies to today’s cryptocurrency mania. Of course, many people disagree.
When successful investors discuss developments such as today’s cryptocurrency situation, you may hear somebody say, “We’ve seen this movie before.” This means they’ve lived through this financial-drama situation before. They know the outcome is unpredictable. They do know it will end badly for latecomers, and has almost certainly gone beyond the point where it offers great opportunity to outsiders.
Investment strategies for beginners: Consistency is crucial
You’ve undoubtedly seen our three-part Successful Investor formula: invest mainly in well-established companies; spread your money out across most if not all of the five main economic sectors and downplay or avoid stocks in the broker/media limelight. But it won’t help you succeed if you apply it just three years out of four. If you do, you run a serious risk of abandoning the philosophy when risk is peaking. That’s when our formula serves you best, and failing to adhere to a sound investing approach can do the greatest harm to your net worth.
Investment strategies for beginners: Look for long-term fundamental value
If you want to invest like Warren Buffet, you have to take a broad view in making investment decisions—with a focus on fundamental value and paying special attention to hidden value.
Buffett’s first great investing achievement was to sell all his holdings in 1969, just prior to the early 1970s market downturn. He felt that 1969 stock prices were simply too high, from a value investing point of view. He re-entered the stock market in 1974, after prices had collapsed by 40% or more. This alone established his investing-legend status. Since then, he has achieved a better-than-average investing record by buying large stakes in a handful of well-established companies.
One thing you won’t find in the making of Buffett’s stock-market fortune is a history of relying on any single investment theme or gimmick. The main contributor to his success is his history of excellent stock-picking, and his practice of holding his top picks for a long, long time.
Investment strategies for beginners: Follow a steady, middle-of-the-road approach to investing
This comes naturally as you develop a Successful Investor mindset. A steady, middle-of-the-road approach offers better odds than erratic or extreme alternatives. That’s because it relies less on timing, or on guessing right about the future. Instead, it helps you take advantage of what you might think of as the laws of financial physics.
You still have to decide what stocks to buy and what stocks to sell, and some of your decisions will disappoint you. But with a Successful Investor approach, your best choices will produce a lot more profit over long periods, and will overwhelm the costs of your disappointments.
What strategies did you utilize when beginning your investing career?
If you could change any decision you made as a beginning investor, what would it be?
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