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Friday, 9 March 2018
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Dumb Money

I recently talked about “Smart Money” and how there are some advantages the big rich investors and institutions have over the private investor. Like having the institutional brokers suck up to them by giving them large licks of discounted share issues and popular IPOs, like writing options over large existing holdings for a bit of extra income, and the main one, being under no personal financial pressure, allowing them to be long-term patient investors, a luxury most of us don’t have.

But other than these few advantages the private investor has a level playing field as long as they aren’t “Dumb”. So here are a few practices that I would consider “Dumb Money” behaviour. They include:

Thinking the whole stock-market is some Machiavellian plot against you. Yes there may be some shenanigans, yes there are things like high-frequency trading, shorting, collusion amongst fund managers to effect a certain outcome, and many other things that might offend your moral and financial fibre, but it is not systematic, and you’d be far better to just get on with your own activity whilst dodging if not exploiting the activity of others.

Thinking everybody else has inside information. This is not how the stock-market works. Yes, I’m sure some people exploit an illegal information advantage very occasionally, but it is a rare rather than mainstream activity, and you really don’t need to worry about it. And anyway, most information that appears as an “inside tip” is usually designed to manipulate you. As one professional trader once told me, “If I had never been given any inside information ever I would almost certainly be $1 million better off today”. Best you don’t worry about it.

You employ the right-hand brain in your investment decisions. Sorry but you are wired to fail as a human unless you can shrug off all emotion and be nothing but logical. Like Spock. If you love or hate stocks, you need to reprogram yourself.

You care about what price you paid. The price you paid has absolutely no relevance to what a stock is going to do tomorrow. Caring about whether you are in a loss or profit and having that affect your next move is called anchoring. A client once told me that Telstra owed him six dollars. No, it didn’t. If you care about what you paid rather than making decisions based on what is likely to happen tomorrow you are a dumb money investor.

Having a preset time frame. Do you call yourself a “long-term investor”? After 37 years in the game, I can tell you that it means nothing other than you are not bothered to be vigilant. My timeframe is “Forever”, which means I’ll hold it until I decide to sell it. That could be the next day or the next decade. But to decide on the timeframe before investing is unrealistic.

Talking about Macro Crap. Sorry but the only thing that matters are the stocks on your Excel spreadsheet. Focus on those. Dinner party discussions about the difference between Janet Yellen and Jerome Powell are just showing off. Unless it impacts your spreadsheet, it’s wasting your time.

Quoting Warren Buffett. I have no interest in listening to you regurgitating the words of more intelligent investors. If you have something to add, say it, in your own words. Add value. Don’t bore other people with someone else’s wisdom. Unless of course, you’re trying to sell a product, because for some perverse reason, quoting Buffett means you’ll sell more.

Listening to and believing economists. Don’t you know that 90% of mainstream economists are working for product selling institutions? Their job is to generate optimism. They sell more product that way. They are commercially biased to cheerful confidence. They will never tell you to sell. It’s only half the story.

Focusing on the known. Almost every piece of information that is available, be it an earnings forecast, a PE, a yield, or a broker’s published recommendation and target price, is in the price. The only thing that moves a share price is something unexpected. So focus on predicting the unexpected. It’s the Catch 22 of the stock market. You have to have an insight. Something that is not in the price.

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