The investment literature is full of old adages that make voicing the next Warren Buffett sound like brushing your teeth.
Indeed, the catchiest has become a cliché.
So, you will hear the same phrase thrown around many times on social media – especially by experts during a crisis in the market.
But pay attention and you will notice that most of these must be clear investing truth this is 100% contradicted with others that are just as popular!
Here are three wisdom heads where you may be tempted to spend your coins instead of for guidance.
#1: “Run your winner” enemy “You won’t go broke taking profits”
You buy a stock, and it goes up 50% in three months.
Good going slugger! But what do you do now?
On the one hand, you can recalculate the bottom line of your business to see how the value of your business is higher than the progress of your operations.
Or perhaps you can focus on that progress. Is your investment thesis complete? Is the price increase warranted by superior newsflow from the company?
Or, you can turn it for you Investment booklet Clichéwhich reminds you that – allegedly – you will not make a profit.
So you go to the sale, but then remember to skim-read the previous entry – one that urges you to reveal the winner!
It’s quite a dilemma.
Obviously I don’t believe that a mantra should guide the next step.
Indeed, running your winner is often a good idea. One well-known study found that only 4% of all US stocks produced all the long-term gains that saw equity investing beat buying US bonds. So, you always want to catch those rare big winners because they persist, just to keep up with the market.
In contrast, selling anything that goes up can be a bad strategy. Because we all buy stocks that go down too, and if you keep cutting the gains from the ones that go up while holding on to the losers, your portfolio can go backwards.
Then again, you could argue that 96% of the companies in the study not deliver all-important results over the long term.
With these stocks, you’re probably better off taking whatever profit they provide while you can and then moving on, looking for multi-baggers.
Oh, no one said investing was easy. Except maybe the person who compiled it Little Book of Investing Clichés.
#2: “Sell in May and go” enemy “Time in the market is more important than timing the market”
Strange, old rhyme “Sell in May and go, come back on St Leger’s Day” has some validity.
Over the long term, the stock market tends to generate higher returns between November and April, compared to May and October.
But before you turn off your stock portfolio for the summer, I’ve warned you!
First, while the so-called seasonal effects are commonly found in the US and UK markets when looking at historical records, this is not a guarantee that they will hold in the future. Nor will it be applicable in any given year.
You can easily liquidate your shares and miss out on the sizzling hot market.
Second, the stock market tends to go up in six months.
Yes, it has a tendency to do better in the cold months, but there is no need to sell up in May, given that often you will see results in the months running until October, too.
Therefore, I prefer the second aphorism, although the data backs up the first.
Instead of worrying about portfolio trading based on nursery rhymes and calendars, focus on buying and holding good stocks – or index funds – for the long term. Add new money when you can, investing regularly over the years.
And let time and compounds work their magic.
You’ll have lower trading costs, you’ll never miss a rally – and you’ll have a more peaceful life.
#3: “Don’t look for a needle in a haystack. Just buy a pile of hay!” enemy “If you really know business, you shouldn’t have more than six”
To mix things up, my last example doesn’t make two very nice phrases. However, here is a head-to-head of the two investment legends quoted.
The first comes from John Bogle. It was a call to invest in the stock market tracking fund that – as the founder of Vanguard – Mr Bogle did so much to popularise.
The second quote is from Warren Buffett. As one of the richest people in the world who got such an investment, maybe you should listen?
It’s more difficult.
The data shows most people will fail to beat the market over the long term. Who prefers John Bogle’s index fund investments.
However, we would never have heard of Warren Buffett investing in index funds, even though they were available when he started.
Buffett is living proof of the potential power of stock picking.
But these two market mavens are not really at loggerheads. Remember that Buffett said that “real business” it should have only half a dozen companies.
Given that Buffett’s instructions in the event of death is that the money left to his wife, Astrid, should go to an index fund, I would say he and Bogle are really on the same page.
If you are ready to dig deep into the business and to make investing passion – and you are ready to risk doing worse than the stock market in the search to do better – then Buffett has shown us one way to get there.
But most of us should put at least some of our money into Bogle’s beloved index funds. Because if you already have a piece of the haystack, then there is no danger in hunting for the needle.
Come to think of it… maybe diversification works as well with investment aphorisms as it does for a stock portfolio!