20 Stock Market Truths
- 50% of making money from the stock market is not picking the best stocks, it's avoiding the bad stocks. So why does everyone spend 100% of the time finding the good stocks?
- Pick all the weeds and you are left with the flowers. Pick all the flowers and you get left with the weeds. Pick the weeds. A small weed is the best weed. Take losses not profits.
- Index returns are a fantasy – Index returns are heavily marketed as an expectation, but they are a fantasy and the accumulation indices that compound dividends are even more fantastic. No wonder your fund manager underperforms. The index perfectly compounds dividends, costless replenishes the bad stocks with good stocks, pays no dealing costs, has no rent, no staff, water coolers, or management fees, and is not, therefore, a reality. I am amazed we all allow ourselves to be benchmarked to it. It is hard to beat. And the relentless sniping from the sidelines that fund managers are idiots because they all underperform the market is not a reflection of the fund manager’s incompetence but the speaker’s ignorance.
- Don’t bother predicting anything - Bear markets start and bull markets end when the market says so and it will only become obvious in hindsight. Best you go with the trend until it ends and react when it does than predict the beginnings and ends which is called guessing. Contrary to popular belief the stock market is not about guessing what’s next, it’s about managing what’s happening.
- If you have a mortgage, every dollar you lose goes on your debt and you pay interest on it, possibly for 20 years. On that basis, with interest rates at 5% for the next 20 years (a generous assumption) every dollar you lose costs you $2.50 and every dollar you pay off is worth over twice as much as it costs. Get the right side of compounding.
- Don’t buy a portfolio, buy stocks, and one day your portfolio will miraculously reappear. Focus on stocks not financial marketing about diversification. The only reason professionals tell you to diversify is so that you can’t sue them.
- Only the unexpected moves a share price - You will make more money guessing what everyone doesn’t know about a stock than you will ever make finding out what everyone knows about a stock. The unexpected moves share prices, not the consensus, so concentrate on the unexpected. That’s where the money is.
- A diversified portfolio of 20 stocks you ignore is riskier than a portfolio with one stock you know everything about.
- You cannot do it the Warren Buffett Way or there would be a fund manager doing it, we would all be invested and we’d all be billionaires. Warren Buffett is not a reality. Warren Buffett is a marketing tool for people that can’t sell their own products on their own merits.
- The market never crashes up - The market falls three times as fast as it rises because losses have three times the emotional impact of a gain. Fear is a bigger driver than confidence and “It takes five minutes to be fearful, but you can’t get confident in five minutes”. Stock markets rise slowly and fall quickly. You have to react quickly to losses. In a bull market, you have time. In a bear market, you don’t.
- An old one - If you ever find yourself standing up and punching the air in delight, it means “Sell”.
- Catching the knife - There is only one thing a falling share price tells you and it’s not “Buy me!”
- Swim with the tide - In a Bull Market, the core virtue is “Participation”. In a Bear Market, the core virtue is “Non-Participation”.
- Sophisticated investors - In a Bull market you are a sophisticated investor when your accountant confirms you are. It takes a bear market to find out whether you are.
- Watch the crowd, feed the crowd, manipulate the crowd, but don’t be the crowd - Bear markets end when the headlines are terrible. Bull markets end when the headlines are euphoric.
- The three biggest weaknesses of an amateur investor – Not selling. Not selling. Not selling.
- The other weaknesses of the amateur investor – Not caring. Not watching. Blaming other people. Crusading. Being emotional. Caring about the purchase price. Being long-term. Being short-term. Making grand declarations about the future. Wasting time on macro rumination. Rushing. Bothering to run a diversified portfolio you could buy for $19.99. Quoting Warren Buffett to other people and thinking you sound clever.
- The only effortless way to get rich is to be born rich. The problem with that is that you only get one shot at it and people far less capable than yourself always seem to succeed at it.
- The second-best way to get rich, but it requires a little more effort, is to marry rich. The best advice my parents never gave me: If faced with two equally attractive potential mating partners for life, marry the rich one.
- Be nice to your children. They will be the first generation of future investors that have no recollection of the 2008 financial crisis and the next generation capable of a bout of irrational exuberance. It will be these delicate little cherubs that eventually pay top dollar for your assets. Nurture them.
"The only reason professionals tell you to diversify is so that you can’t sue them."
Marcus Padley, Marcus Today