The market is effectively a near living, near spiritual entity that exists for one goal and one goal only - to embarrass as many people as possible for as many dollars as possible for as long a time period as possible. And it is really effective at it. It wants to humiliate you, me and everyone else. It wants to humiliate Republicans and Democrats and Tories. It is an equal opportunity humiliator. Your goal is to engage The Great Humiliator without ending up humiliated by it.
2. Never forget - you are really Fred Flintstone.
If you always remember you have a stone age mind genetically trying to deal with post-industrial revolution problems, you will better understand your cognitive difficulties in seeing the market correctly. We got our brains from our ancestors and they are both genetically identical to those that existed before markets did, but also the ways we process information are almost identical to they way information was processed thousands of years ago. When you think of a tough stock market problem in terms of how would a stone age person think of this, it takes you to rudimentary evolutionary psychology, which is closely linked to behavioral finance and leads quickly to being able to see yourself better and better understand your problem.
3. The Pros are always wrong.
For decades people have presumed that the little guy is wrong and the sophisticated pro is more likely to be right. The concept is cute but is inconsistent with finance theory. The reality is that professional consensus is always wrong. Why?
The market is a discounter of all known information. That is core finance theory. Everyone has information, but on average professionals have a lot more access to information than normal people. Professionals as a group have access to all essentially known information. So, if you can figure out what professionals as a group believe will happen you know what has been discounted into current pricing from all known information and therefore cannot happen. It is theoretically and empirically perfect.
The pros as a group are a perfect guide to what won't happen. Knowing what won't happen doesn't tell you what will but eliminates a big part of the possibility spectrum and gives you a leg up on figuring out what may happen.
4. Nothing works all the time.
Sometimes growth is hot. Sometimes it's not. Sometimes value leads. Sometimes small caps do. Sometimes foreign stocks lead and sometimes domestic stocks do.
Investors have layered their thought processes on top of thousands of years of a prior process we did well that we now call collecting. Thousands of years ago people collected food, stone points for spears, firewood and much more. Now people collect for fun because our brains are adept at it. Collectors collect consistent with their biases and their access to information and or stuff. Their collections tell you more about who they are than the stuff.
In equities they collect in categories consistent with their biases, like value, growth, etc.... The value guy and growth guy both think their categories are basically and permanently better. But in the long run they all end up with almost exactly identical average annualized returns, and must - it is core to how capitalism's pricing mechanism works.
5. Most investors will go to hell or die not understanding why.
If you don't fathom number 4, above, and actually believe that some category of equities is basically better or worse than others, you are not alone. Most investors, being collectors, believe that, including most professionals, most of whom are collectors.
But to say some equity category is basically better permanently is to say that you either disbelieve in capitalism, in which case you are sure destined to hell, or that you don't fully fathom its pricing mechanism.
In the long term supply is much more powerful in setting securities prices than demand and the only marginal costs of new supply are distribution. All other costs can be amortized over large unit volume to drive them to zero if the price of the equities is high enough. What that means is that as soon as investment bankers see any excess demand for any equity category they busily go about the process of starting to create new supply to meet it. To the extent they do so, which may take some time, they pull that category's pricing back into line with all other categories. When you look at 30 year average annual returns of equity categories they are all essentially identical and always will be. It is core finance theory.
6. Heroes are myths.
The great investors of the past were mostly innovators, but because they were if they were alive today they wouldn't do it now the way they did it then. That was then; this is now. Almost everything from the past is obsolete now.
Think of it like being Intel. If Intel made semiconductors now like it did 15 years ago, it would be broke. You have to keep learning, changing, adapting and adopting the latest and newest capability. If you don't you will get left behind. If you don't believe that, watch me leave you behind. Hence it is a mistake to say things like, "I want to be an investor like Ben Graham (or any past guru) was" - because they wouldn't do it like they did themselves - now.
7. Pray to The Luck God.
In behavioral finance theory the ultimate sin is accumulating pride and shunning regret. Accumulating pride is a process that associates success with skill or repeatability. Shunning regret associates failure with bad luck or victimization. Accumulating pride and shunning regret is something people have done in our normal lives for more than 25,000 years, since Homo Sapiens first walked as modern man. It motivates us to keep trying in non-financial activities and is surely good.
But in financial activities it cause us to become overconfident and enter into transactions for which we have no particular training, background, experience or special knowledge and when we enter into overconfident decisions we get bad luck - we become unlucky.
To become lucky reverse the process and learn to shun pride and accumulate regret. Then you assume success was materially luck, not skill and not particularly repeatable. You assume failure was not bad luck or victimization but your own lack of skill and hence mandating introspective lessons to self-improve. When you do that you make less overconfident decisions and become fundamentally lucky instead of unlucky. This is just using finance theory to get lucky.
8. Market timing is terrible unless you time it right.
Most of the time the market rises. Unless it is a real bear market, all attempts at market timing backfire and become very costly. But when you actually encounter a real bear market, recognizing it and taking corrective actions is near life saving. But it is hard to do because you have to build and maintain the skills for so doing while not deploying them for years and sometimes many years during bull markets. Usually people who don't use skills for a long time eventually lose them. Not very many folks can do this.
9. A bear is bullheaded until you can't bear it.
The change in psychology that is the sign of a shift from a bull market to a bear market is that early in a bear market downdrafts are met with increased optimism. In a bull market, because the market has been rising more than folks expected, every correction is short, sharp and strong and met with near hysteria from panicky investors who fear the bull markets up-move will be largely retraced on the down side. They didn't expect or understand the up-move so they fear wild stories about things that could make it vanish.
But after a long bull market they have learned to always buy the break, and that long-term investors always come out ahead. And then as the market drops they see it as an opportunity and become more optimistic (which you can measure by watching professional investor sentiment), and spend their cash, using up their spare liquidity and leaving none to support stocks later.
10. When you get really good: quit.
Kids aren't so good as investors. They don't know anything yet. They are impulsive and have very short senses of time. Old investors aren't very good either. They get rigid and can't change with the winds. The best investors get best between the ages of about 35, after they've gotten some real experience, and peak by about 60 or maybe even a little earlier, by which time they start slowing down.
Different people are different but I've never seen a really old investor who hadn't pretty well lost most of his prior skill set. Part of what makes a great investor is his ability to adapt but when you get too old you lose that ability. So if you've been really good, and hit it really well, plan in advance when to quit and when you get there, just stop making decisions.