The 10 most important lessons in finance from a legend in the field

[Editor’s note: Yesterday, we published a podcast we recorded with the legendary financial commentator, Jim Grant.

Jim is the editor of Grant’s Interest Rate Observer – one of the most-respected and followed financial publications in the world. In his 35 years writing Grant’s, Jim has seen a financial cycle or two.

And he’s amassed a network of many of the most important people on Wall Street (who often share their insights in his publication).

We’re excited to share a special piece from Jim in Notes today about the 10 most important lessons he’s learned in his 35 years in financial markets.

It’s a bit long, so we’ll publish the first half today and the rest tomorrow.

We’ve also arranged a special deal with Jim for Sovereign Man readers, which you’ll see below.]

From Jim Grant:

I’ve published over 800 issues of Grant’s Interest Rate Observer to date… That’s more than four million words of market analysis.

I’ve made some good calls in that time (and, yes, some bad ones).  I’ve even gained some fame – at least in certain circles – for my more accurate predictions.

But, more importantly, I like to think that I’ve become a knowledgeable student of Mr. Market. I’ve lived through and analyzed manias and crashes.  I’ve seen interest rates fall from 20% to zero – and below… I’ve seen the stock market sawed in half and I’ve seen stocks rise far above any sane measure of valuation.

And through it all, every two weeks, I’ve shared my thoughts with a select group of readers.  Many of them have been with Grant’s since day one.

With that in mind, here are the 10 most important lessons I’ve learned in finance…

1. The key to successful investing is having everyone agree with you — LATER. The most popular investment of the day is rarely the best investment. If you want to know what’s popular, look no further than the front page of your favored business journal… Or just tune in at your next cocktail party.

At Grant’s, we seek profits where no one else is looking. We’re happy to wait for the consensus to come to us.

We’ve been contrarian since day one. In our minds, there’s no better lens through which to view the market.

2. You aren’t good with money. Because humans aren’t good with money. We buy high and sell low because it’s what comes naturally. It’s difficult to control emotions. It’s more difficult when money is involved.

But with detailed security analysis and an expert understanding of market cycles, you can minimize emotions when it comes to your portfolio.

 3. Everything about investing is cyclical… prices, valuations, enthusiasms. And this will never end. The greatest investors develop a sense of when markets have reached euphoric levels. And of when fear is crippling reason.

 Where do you think we stand on that scale today?

4. You can’t predict the future. Nor can the guy who claims he can.

You can, however, see how the crowd is handicapping the future. Observing the odds, you can make better choices.

You can recognize the rhythms of market cycles (see lesson 3). And with enough practice, you can profit from those cycles – or at least avoid disaster. As when we warned Grant’s readers in our September 8, 2006 issue about a bubble in subprime mortgage debt – 11 months before the crisis began. And three years later, when we advised going long bank stocks before they rallied 250%.

5. Every good idea gets driven into the ground like a tomato stake. Exchange Traded Funds (ETFs) were a great idea. They allowed investors diversified exposure to a number of markets for minimal fees.

 Today, ETFs account for more than 23% of all U.S. trading volume with a total market value over $3 trillion. And the ETF market is forecasted to hit $25 trillion globally by 2025.

Yes, ETFs allow investors to diversify into lots of markets for a little bit of money. But ETFs allocate money without consideration of value.

And what happens when everyone rushes for the exits?

P.S. We’ll follow up with the final five lessons from Jim in tomorrow’s Notes. In the meantime, take a look at the incredible offer Jim has made to Sovereign Man readers… it’s a way to access a private event he’s holding next month in New York City with several billionaire investors. You can get the details here…

About the Author

Simon Black is an international investor, entrepreneur, and founder of Sovereign Man. His free daily e-letter Notes from the Field is about using the experiences from his life and travels to help you achieve more freedom, make more money, keep more of it, and protect it all from bankrupt governments.