From a broad or general perspective, this investment lesson is simply to apply the discipline to only take investment advice from credible sources. Unfortunately, it has been my experience that most investors are keen to get their investment advice from pathological liars. Obviously, pathological liars are not a reliable source.
More specifically, this important investment lesson is: do not base investment decisions on stocks based on short-term price volatility. Truly aware investors recognize and accept the reality that stock price movements can be, and often are, irrational in the short run.
The key is to think and act like a business owner when you purchase a stock. When people invest in or start a new business, they are not thinking about selling in the next day, month or even year. Instead, they are thinking about owning and running the businesses for years to come. Of course, if the businesses are privately held, there is also the benefit that no one is continuously shoving purchase quotes in their faces either.
It’s critical to understand and remember that short-term price volatility is not always rational and certainly not always fundamentally based. Instead, short-term price volatility is more often than not emotionally charged. Consequently, a rising stock price is not always indicative of a good company, but sometimes it can be. Conversely, a falling stock price is not always indicative of a bad company, but sometimes it can be.
The secret is to have a realistic assessment of the true value of the business you own, and make your buy, sell or hold decisions accordingly. The primary point is to focus your attention on how you think the business will perform going forward.
In the long run, stock price will inevitably relate to business results. In the short run, fear or greed can drive the price up or down unjustifiably. And most importantly, short-term price aberrations are totally unpredictable. Therefore, you cannot, and I argue should not, place too much importance on them.
In the long run, stock prices will correlate very closely to the success of the business behind the stock. Therefore, if you are a prudent long-term oriented investor, it only makes sense to focus more on business results (fundamentals) than it does short-term price action. The reason I consider this the most important stock lesson I ever learned is because it allows me to make rational decisions in the face of emotionally charged periods of time.