Ten quick lessons
Ten stock market lessons you should already know:
One – This is an oldie but a goodie. If you ever find yourself standing up at your dealing desk punching the air in delight, it means “Sell!”. Clearly your expectations have been exceeded and whether the stock goes up any further or not, you are happy with the result so far.
Two – Another classic. If anyone ever says “We have entered a New Paradigm in equity investment”, it’s code for “were in the bubble”. Sell.
Three - There is only one thing a falling share price tells you and it’s not “Buy me”. I do not know what it is about the Australian culture, but if something falls in price, everyone wants to buy it. It’s why most retail shops have permanent “Sales”. When something is 25% off in the stock market is because something is wrong, not right. A falling share price more often than not means “Sell me” not “Buy me”. Its Technical analysis 101.
Four - The market falls three times as fast as it rises. An academic study into behavioural finance once concluded that losses have three times the emotional impact of a gain. It explains a lot. Fear is a faster driver than confidence. It takes a lot longer to become confident than fearful. In a bull market you have time. In a bear market you don’t. Buy at your leisure, but be prepared to sell quickly.
Five - Humans are not natural investors. We need investment mechanisms to protect ourselves from ourselves and an understanding of our human weaknesses so we can identify our mistakes as we make them. For instance, if you have ever loved or hated a stock, you have fallen victim to emotion. Emotion does nothing but cloud the investment process. The right hand side of your brain is unsuited to successful investment. You need to mimic Spock, logical and analytical, not emotional. Our natural triggers of fear and greed are useless.
Six - No-one ever tells you to sell. Step onto a car lot and expect to be sold a car. Appear in the offices of the finance industry and expect to be told to invest. We are there to get you in not let you out. So when you want to sell it will have to be your decision and expect to meet resistance as you try. We’re not going to give up our product and advice fees without a fight. Come the crunch, a GFC, a market downtrend, it is you that will have to pull the stumps, not us and you will have to be assertive to get it done.
Seven - There are no crystal balls. When it comes to tomorrow financial theory tells you to look at history and project it forward. It’s rubbish. Tomorrow is not a reflection of the past but is in fact a blank canvas. Historic returns are not future expectations, they are statistics. Watch out for the regurgitation of statistics masquerading as informed research.
Eight – If half the game is about making profits then the other half is almost certainly avoiding losses. It’s about not cocking it up. Getting it wrong has as much impact as getting it right, if not more, because losing 10% requires you to make more than 11% to get it back. To control losses you need to watch what happens to your investments after you have bought them and act when proved wrong. It is this latter bit that the buy and hold philosophy turns a blind eye to and that’s why ‘Set & Forget’ doesn’t work except in hindsight on select examples. Buy and hold was never alive, its weaknesses were just hidden by a bull market. The market talks. Buy and hold merchants don’t hear, let alone listen, let alone act and the guy that came up with the line “If you never sell you never take a loss” is a complete idiot in denial. Sometimes you wonder if long term diversified investment isn’t really just a concept the finance industry came up with as an excuse for not having to pay attention. I’m sure Babcock & Brown, ABC Learning, Sons of Gwalia, Pasminco, Ten Network and Paladin were all long term investments once.
Nine - Timing the market. If you want to save yourself ten years of going nowhere it is clear that occasionally, just occasionally, are going to have to time the market. But let that not dismay you, timing the market is half the fun. Making a judgement and taking a risk is why we’re here and the finance industry would do well to embrace it rather than hide in the cliché that you can’t. If the finance industry is going to survive, if we are ever going to differentiate ourselves from the execution only alternatives, we surely have to have a stab at it. At timing. At telling people “when” as well as “what”.
Ten - Be good to your kids. Those kids we are packing off to primary school on Monday are the first generation of investors who will have no experience of the 2008 Crash and are therefore the first generation capable of irrational exuberance once again. We will be selling them all our assets at the top one day. So be nice. It’s us and them.