A decade-and-a-half ago, Josh Brown was working a dead-end job at a third-tier brokerage firm, hustling to survive in the middle of the global financial crisis. He was so disillusioned by how small investors were treated—being offered costly annuities, risky stocks, high-cost mutual funds, all of which lined the pockets of their financial advisors—he quit and started a social-media blog called “The Reformed Broker,” a brutally honest insider account of what financial professionals think but never say out loud. Topics regularly included the humbling mistakes Brown and his colleagues made when buying and selling stocks…investment tricks that could tip the balance between failure and success…how to protect your money from your own worst instincts…and how not to get eaten by the sharks—advisors who are not fiduciaries, concerned only with their own success and commissions. Along the way, Brown built a $5 billion registered investment advisory firm.
Brown’s tell-it-as-it-is approach is especially valuable today because of the tsunami of information and advice on the Internet that makes it hard for small investors to know whom to trust. Bottom Line Personal asked Brown about the hard truths you need to know to be a better and more successful investor…
No risk, no reward—that is the reality of long-term investing despite all the new-fangled exchange-traded funds (ETFs) promising you stock-like returns with little or no risk. Good news: The stock market has always bounced back, so don’t panic and sell at the bottom. I have a simple psychological trick to cope with severe pullbacks and corrections. Whenever the stock market plunges, I target a handful of stocks that I’ve always dreamed of owning but were way too expensive. I put in a buy limit order with my broker to purchase these dream stocks but only at share prices so low it would take a miracle to ever get them. Doing this has two benefits…
It changes my mindset. Subconsciously, I start rooting for the market to keep going down. I’m so focused on snaring incredible bargains that it distracts me from obsessing over the drop in my existing portfolio.
Every once in a while, I nab my dream stocks! Some of the most lucrative investments I’ve made in my career occurred this way. Example: Just before the bear market in March 2020, Starbucks was trading at $90 per share. I put in a limit order of $60 and got it. Over the next year, Starbucks stock rebounded to $120.
This idea is a favorite of investing guru of Warren Buffett, but I had to lose a ton of money in stocks before I understood what he meant. Even if you are really smart and knowledgeable, you will make astoundingly dumb investment mistakes if you aren’t conscious of and in control of your primal emotions. Three of these emotions…
Lust—falling in love with a company, product or story because you are certain that it will change the world and your financial future. Example: In the early 2000s, I loaded up on stock in Jamba Juice, a quick-service chain that sold blended fruit and vegetable juices. I was convinced this company was at the heart of a health revolution. But the stock turned into a fiasco. There was a nationwide orange crop freeze, and Jamba Juice’s share price fell from $12 to $1…and I rode it all the way down. Reality check: Stocks don’t care if you love them. If the facts and fundamentals contradict your enthusiasm, you need to look at that. When you buy a stock, write down the specific reasons you bought it so you can refer back to that in the future.
Sloth—putting off for months or years what you know you should do, then twisting yourself into a pretzel trying to justify your inaction. This is infuriating because it’s so preventable. Examples: My clients say they’ll start contributing enough to their 401(k) plans to get their full employer match as soon as they get a raise…or they promise to rebalance their overall portfolio as soon as the bull market peaks. Reality check: Automate as much of your investment and personal life as possible. That way you don’t have to worry about feeling motivated enough to take action.
Wrath—engaging in “revenge trading.” Whenever I lost money in a stock, I used to blame Wall Street analysts, the Federal Reserve, President Putin—just about anyone else for my own lousy decisions. Then I would take even bigger risks with the stock market to make back my losses. Reality check: The stock market doesn’t owe you for the pain or loss of capital you’ve endured…and there is no requirement that you must make back your money the same way you lost it.
The first thing I ask every client is, “Why are you risking even a penny of your money in the stock market?” If the answer is, “To have more money” or “To beat the S&P 500,” I tell them that response is not helpful in creating and maintaining a successful portfolio. Neither is just checking off the boxes on a risk-tolerance questionnaire. Better: Define what specific goals are most important to you over a given time frame. Example: 10 years from now, you need $300,000 to purchase a vacation condo in the mountains because you love to ski. Once you know how much money you need, you can figure out the return you’ll have to get from your portfolio, and then an interesting thing may happen—you realize that you don’t need to take the maximum amount of risk to achieve your goal.
A lot of risk-averse investors have been happy to build up huge cash positions in recent years. I get it—you were earning risk-free 5+% yields on your cash in money-market funds. But now that the Federal Reserve is bringing down short-term interest rates, consider putting cash that you don’t need soon to work. Reason: Getting out of the stock market whenever volatility strikes and investing whenever the coast is clear produces a “sell low, buy high” outcome. It’s particularly self-defeating to try to time the market with cash because stock gains typically occur in very concentrated bursts. Example: If you had invested $10,000 in the S&P 500 Index in 1994 and held that through 2023, your portfolio would be worth $181,763. If you missed the stock market’s 10 best days during those 30 years, your portfolio grew to just $83,272. If you missed the best 30 days, it grew to just $30,899—83% less than if you had stayed fully invested! Even more important: You cannot predict when those best market days will happen—50% of them took place during bear markets…another 28% occurred during the first two months of bull markets.
Successful investing is simple—but it’s not easy. The secret is to formulate a consistent plan that you can stick with…and then actually stick with it. You don’t have to find the next Tesla or Nvidia. You just have to avoid “unforced errors”—the kinds of mistakes you make when you don’t follow common sense.
Here are eight common-sense rules I’ve developed over the years that can help you avoid unforced errors. These rules aren’t right for everyone in every situation, but they have worked for me…
