1. If you ever find yourself standing up at your dealing desk and punching the air in delight, it means “sell”.
2. If anyone ever says, “We have entered a new paradigm in equity investment”, “stronger forever”, “the Chinese economy has de-coupled from the global economy” or “we have no sub-prime exposures”, three stockbrokers list in a year or the ETF industry creates an actively managed ETF that targets a particular theme, sell!
3. There is only one thing a falling share price tells you and it’s not “buy me”.
I don’t know what it is about the Australian culture but if something falls in price everyone wants to buy it.
A falling share price means “sell me” not “buy me”. It’s technical analysis, page 1.
4. 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 is a lot easier to miss out on profits you never made than it is to lose profits that you did. Fear is a bigger driver than confidence and, as Warren Buffett says, “it takes five minutes to be fearful but you can’t get confident in five minutes”.
Stockmarkets 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.
5. Humans are naturally bad investors. They are wired for hope, to like, to hate. Because of that they make terrible investors.
Investors need to think like Spock. Be Spock.
Vulcans make much better investors. They are wired to coldly process the information and make a decision, while we get confused, depressed, optimistic, pessimistic, and worry about whether we are in loss, or profit, anchoring ourselves to some previous share price that is now irrelevant to tomorrow’s share price.
None of that helps; it just gets in the way.
6. No one ever tells you to sell. The best stock in a bear market is cash but, amazingly, no one ever tells you to sell and this is perhaps one of the most important lessons from the GFC. The finance industry is a marketing machine.
It is designed to get you in, not let you out. Anyone who has ever tried to exit a managed fund will tell you. Anyone who has ever rung up a financial planner and told them they want to sell will know. The financial industry is not in the business of facilitating the exit of fee-paying clients. You have to take responsibility for making the decision to sell. It is yours to make, and the finance industry will resist you.
7. There are no crystal balls. Tomorrow is a blank canvas.
Investment sails on a sea of uncertainty. It is about probability not certainty. The best you can do, through research, is to improve the probability of success, because nothing is 100% certain.
8. Time is money. “Buy and hold” and “set and forget” are unrealistic and utopian because they breed inaction and denial. Inaction in the GFC cost 54.5% from top to bottom and in order to recover that loss the market had to go up 119%.
At the average return of 9.5% a year, were we to be so lucky, it should have taken us 8½ years to get our money back but so far it has been 10 years, and we are still down 15% from the 2007 high. It’s not the money that hurts, it’s the time.
9. The difference between success and failure is not what you do before you buy a stock but what you do after.
Half this game is not picking the right stocks; it is getting out of the stocks that you get wrong. It is about avoiding losses. It is about not cocking it up. It’s almost more important than getting it right.
10. You have to time the market. If we want to save ourselves 10 years of going nowhere again it is clear that occasionally, just occasionally, we 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 cliche that you can’t time the market.
Finally, be good to your kids.
Those kids you packed off to primary school this morning are the first generation of investors who will have no experience of the 2008 crash and are therefore the first generation since then who are capable of irrational exuberance.
We will be selling them all our assets at the top one day. So smile and be nice. It’s us and them.