Our daily lives are crammed with punchlines and parables. Investing has a language of sayings and catchphrases of its own. Some encourage action, others espouse knowledge. This column highlights some of the more well known. Good, bad or indifferent.
We begin with what Sir John Templeton called “The four most dangerous words in investing: 'this time it's different.’” There are different interpretations of the quote but most regularly it applies to ignoring history at your own peril. When in reference to the stock market, there’s always going to be unforeseen ups and downs but overtime more ups than downs. Long term disciplined investors have historically been rewarded for maintaining that discipline despite the opinions of pundits and prognosticators.
Buy low, sell high. It’s probably the most simplistic expression, yet the most difficult in practical application. Namely, buying when things appear bleakest and selling when things look great isn’t exactly a natural human inclination. In fact, looking at equity mutual fund cash flows through the years, exactly the opposite is the tendency. The last market downturn saw massive outflows in 2008, reversing course in the ladder part of 2009 well after markets went into recovery mode.
I got in early. Usually, you see this in reference to a perceived new investment idea. The issue is, it’s almost impossible to quantify the statement thanks to the speed at which information travels and is incorporated into prices. Simply put, an investor really has no way of knowing if they got in early and should most often work under the assumption that prices reflect all available information. Similarly, “Buy the rumor, sell the news” speaks to speculation on what could happen, while failing to comprehend how much of the “rumor” has already been factored into current prices.
“I’m waiting for the pullback” suggests that prices in some way are inaccurate and an investor has the foresight to time the market perfectly in order to take advantage of a subsequent uptick. The perils of attempting to time the market are well documented. The problem is making a single accurate decision isn’t nearly good enough. To be a successful an investor would have to decide when to get in and when to get out multiple times over an investment lifetime.
The trend is your friend. That is of course until it’s not, meaning- keep buying when it appears to be going up and start selling when it goes down. One of the biggest mistakes investors make is failing to recognize that markets operate on “news” which by definition is unpredictable or else it wouldn’t be news. Essentially, there’s no way of knowing what is a trend and what isn’t.
It’s a market of stocks, not a stock market. This classic day trader proverb implies that you can always make money providing you pick the right stocks. The issue with stock speculation is the evidence of long term success isn’t remotely on the side of active traders.
Bulls make money, bears make money, pigs get slaughtered. This demonstrates an active trader’s mentality that superior skill can make money in any market, but only within the confines of their own greed. Again, we see speculation on when to get in and when to get out, a short term mentality that requires the daunting task of accurately identifying when a stock is over or underpriced.
On the flip side: Here’s some of the wisest
I’d compare stock pickers to astrologers but I don’t want to bad mouth astrologers. Rarely at a loss for words, the father of modern finance and Nobel Prize winner Eugene Fama speaks to the difficulties in identifying stock miss pricings. Based on decades of data, studies have shown that the average actively managed dollar is far more likely to underperform the average passively managed dollar.
Warren Buffet is probably the most quoted investor of our time with gems like “When the tide goes out, you see who’s swimming naked” in reference to having a lack of diversification in your portfolio when markets pull back. In these instances, concentrated exposures in any one specific investment can spell disaster for a portfolio. Other Buffet favorites include: “The most important quality for an investor is temperament, not intellect” and “Be fearful when others are greedy. Be greedy when others are fearful" both speaking to the well-known emotional tendencies of investors. Above all, patience and levelheadedness are two attributes that investors should hold in the highest regard.
John Maynard Keynes’s famous line “Markets can stay irrational longer than you can stay solvent” has been used to describe a variety of scenarios not limited to the disposition of investors and the unpredictable nature of markets. We’ve been through five different bull and bear markets over the last 27 years, each with significant variations in how long they lasted.
Author of “The Intelligent Investor,” value investing pioneer Benjamin Graham spoke to "The investor's chief problem, even his worst enemy, is likely to be himself." Most investors have emotional attachments to hard earned money, which can lead to decisions that are detrimental to long term success. He also thought that “To be an investor you must be a believer in a better tomorrow.” It’s a basic prerequisite to believe that advancements in technology, standards of living, and ultimately profits will rise over time. Without this ideology, there would simply be no reason to invest.
Index Investing pioneer and Vanguard founder John Bogle provided some simplistic advice in reference to having all your exposure to stocks "If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks". It’s critical to thoroughly understand your risk tolerance for market fluctuation. As your exposure to stocks increases, generally speaking, so does the level of risk in your portfolio. An investor should never take more risk than they can sleep with at night.
Nobel laureate Paul Samuelson felt "Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas." There’s a difference between investing and speculating. The whole idea of being an investor is to grow assets over the long term. Aligning long term investment growth with short term entertainment isn’t a heck of a lot different than gambling.
Finally, a few warnings about the wisdom of Wall Street and giving too much credence to media pundits. “There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.” - Peter Lynch
Many of the financial products coming out of Wall Street over the years are bought and sold on the premise of being the next hot thing. As rule of thumb, you should always know how your money is invested, complete with a thorough understanding of the potential risk, fee’s and liquidity associated with any investment vehicle.
And Ex-Daily show host John Stewart on the 2008 market downturn: “If I’d only followed CNBC’s advice, I’d have a million dollars today. Provided I’d started with a hundred million dollars.” Don’t’ put too much stock in the daily commentary from talking heads whose job is to keep you reading, listening or watching. Instead, focus on your unique situation and look for help from qualified professionals who have your best interest in mind.
It’s certainly not a comprehensive list but I hope you enjoyed it. The next time you hear one of these phrases remember to keep it in the proper context.
By Tim Baker, CFP®
Advice and investment design should rely on long term, proven evidence. This column is dedicated to helping investors across the country, from all walks of life to understand the benefits of disciplined investing and the importance of planning.