90% of people get the first step of investing wrong. Most of us start investing like this: We see the market rising every day, hear that relatives and friends have made a lot of money investing, so we immediately open an account, immediately buy, afraid of missing a great opportunity to get rich. But only when we find ourselves standing on a high hill, feeling the cold northwest wind, do we realize that it’s cold at the top. I’m no exception—I went through the same thing back then. Looking back now, I was too young then. Now I understand that to invest well, you must first understand these 3 things.
First, don’t do what you don’t understand. These four words look very simple, but very few people can actually do it. What counts as understanding? Duan Yongping gave a very practical criterion: If a company were not listed, would you still buy it at the current price? If yes, that’s called investing. Many people buy stocks because they think it will rise tomorrow, but that’s not investing—it’s speculation.
Before investing, you must establish the correct investment philosophy. There are many investment philosophies, such as buying a stock is buying a company, Mr. Market, margin of safety, concentrated investing, and so on. Among them, “buying a stock is buying a company” is the most important. What you buy is not a ticker code, but partial ownership of a company. To understand what true investing is, you must first learn. After exploring for 16 years, in my view, the best teacher for learning investing is Buffett. Buffett’s letters to shareholders over the years and Buffett’s speeches at Berkshire shareholder meetings must be read more and repeatedly. If you find them hard, read more—slowly you’ll understand. If you find them simple, read even more—only then will you know they’re really not simple.
Second, start with simple index funds. You might think: Index funds have average returns. Is there a more powerful investment method? But I want to tell you a truth about investing: 80% of people can’t even beat index funds. Buffett said long ago that for most amateur investors, the best investment method is to buy low-cost index funds and hold them long term. Duan Yongping also said that if your circle of competence is limited and your understanding of businesses and investing is not deep, then the S&P 500 index is the best investment method for you.
Now when I see some investment beginners starting with index funds, honestly, I’m really envious. I can’t help but sigh: Where did I get the confidence and courage back then, not studying, not reading, just buying randomly, and thinking I could beat 80% of market participants? Now I finally know the answer: That’s called “ignorance is fearless.” Buying an index is not about not understanding—it’s about knowing that you don’t understand, and that is precisely a sign of understanding. Being willing to accept the market’s average return and willing to get rich slowly—if you have this mindset, you’ve already surpassed most of your peers.
Third, invest with spare money. Investing is a long-term matter. Compounding needs time to exert its power, so this money cannot be touched in the short term. What is spare money? In Duan Yongping’s view, only money you won’t need for at least three years counts as spare money. Since investing requires spare money, you certainly shouldn’t borrow money—especially short-term borrowing. Otherwise, during your holding period, the pressure will be enormous. When it falls, you panic; when you panic, you sell. This is human nature’s instinct to seek advantage and avoid harm. It’s unavoidable. Even if you hold good companies or good indexes, you still won’t be able to hold on. I’ve stepped into this pit, three times. So if you understand this, you should save a lot of tuition.
Don’t do what you don’t understand. Start with index funds. Always invest with spare money. These 3 things to understand before investing sound very simple, but those who can do them have long since surpassed most people in investment returns. If you’re a beginner investor, starting today, understand these three things before you act. There’s a rule in investing: The fewer times you act, the more you earn!