The Motley Fool Investment Guide: Third Edition: How the Fools Beat Wall Street's Wise Men and How You Can Too

For years, small-cap investors have clung to studies that showed that over long periods, small stocks outperformed large ones. This is true, but you have to be careful when looking at these studies, because the data and the conclusion changes depending on what time frame you are measuring and which groups of stocks or indexes you are looking at. Fo

Learning to be patient is one of the most important lessons for investors, but one of the most difficult to internalize. When the market is tanking and your portfolio is leaking more money with each hit of the refresh key, the inclination is to do something. Just when you should be most patient, your emotions and your brain make you the least.

Investing is ultimately a battle with your own behavior. No matter how much technical knowledge you accumulate, the odds are that you’ll have an unhappy investing experience unless you understand the behavioral biases we’re born with that, sadly, cause most investors to buy high, sell low, and earn subpar returns.

The successful investor Bernard Baruch was once asked at a party for some stock picks. Rather than share his favorite ticker, Baruch explained his simple methodology for finding winning investments—one I’ve embraced as well: Find companies whose product you buy, use, throw away, or however you’ve used it, you need to repurchase it within thirty day

The primary reason for buying small-cap stocks is that mutual funds and institutions often cannot buy them . . . yet. Or even if they can, mutual funds and institutions cannot build up any meaningful holding. “Meaningful” here is defined as “in a sufficient quantity to make any noticeable difference to the fund’s overall performance.

Never underestimate your mind’s power to convince you to do something you know you shouldn

LUDIC REASONING Coined by Nassim Taleb in The Black Swan, this is the belief that the real world can be predicted with mathematical models and forecasts. It leads people astray because models are purposely simplified, while the real world is incomprehensibly complex.

OVERVIEW: WHAT TOM LOOKS FOR 1. An ownership structure that is vested and aligned with the interests of shareholders. 2. A higher purpose that inspires long-term growth. 3. Evidence that when the business wins, customers, employees, and the world also win. 4. High levels of employee engagement and retention.

CULTURE CHECKLIST A company founder who serves on the board or in company leadership. More than 5 percent insider ownership or executives who own meaningful personal stakes. Executive compensation that seems fair relative to the size and performance of the business. An employee-based CEO approval rating of more than 80 percent via Glassdoor. A work