Investing Truisms: Are They True?

Over the years I have learned many investment adages, which I recite to my team whenever I get tired of thinking and need to reduce complex situations to bite-size chunks of wisdom. These have been passed down from Wall Street generation to generation, but are they true? As I sit here on my couch, immobilized with a broken shoulder and filled with Advil and Tylenol, it seemed a good and time-consuming opportunity to consider that question.

Please feel free to add your own truisms in the comments, and share!

Don’t Trade a Mistake – Meaning that when you regret a recent investment decision, reverse it immediately. I rate this saying 75% accurate. Especially if the original trade was based on intuition, and intuition starts saying something different, it’s better to pay attention to your gut and get out. I have had too many positions that I put on in a speculative mood and then struggled with for years, hated eyesores on my portfolio.

Bulls Make Money, Bears Make Money, Pigs Get Slaughtered — This suggests taking profits and not overstaying your welcome. While this may be good advice for short-term trades, for most investors I urge holding on to your best stocks, for the reasons laid out (eloquently) in my first Substack post, Value Investing: Lessons From Major Art Collections. As for bears making money, in my experience it is the unusual one who does — as someone once said, you don’t come across a lot of billionaire pessimists. And the third clause — I recall a partner I worked for at my old law firm dismissing it and saying, “My best clients are professional pigs.”

Don’t Catch a Falling Knife — 80% true. A crashing stock will attract the attention of buyers who envision themselves cool-headed hunters snaring a bargain while others panic. The problem is that, when a stock is broken, it can fall farther than anyone imagines or thinks fair, and the once smug contrarian will often find himself down 50% and crying. I like to quote Bob Dylan: “When you think you’ve lost everything/You find out you can always lose a little more.” It’s better to wait for the sellers to capitulate and see the stock bounce along the bottom for a while, and then start buying. One caveat is if the stock is illiquid and a meaningful stake can only be bought on the way down, as blocks are being puked.

Buy When There’s Blood in the Streets — This adage, attributed to the 18^th century British Baron Rothschild, is often applied to emerging markets. In this context, it is both true and bad advice. There is always blood in the streets somewhere, but your outcome from buying, say, Russian vs. Lebanese stocks today will be radically different. Some of my best investments ever were in places where the blood was, if not flowing, recently dried, e.g., Russia in 1994 and Georgia in 2004. On the other hand, I have also seen many Next Big Thing markets that never were, like Iran and Cuba. Plenty of investors, my funds included, have tried to buy Ukrainian stocks during previous turmoil and experienced only losses (though several men I know returned home without riches but with wives way out of their league). As for the adage, it has to be certain blood and certain streets to work, and no one has a roadmap.

Averaging Down Killed More Jews Than Hitler — I have covered this expression in a previous post, prefacing it by saying that it doesn’t offend me as a Jew. First, it is so freighted with context that it would take Professor Steven Pinker to unpack it, and second, it is the essence of Jewish dark humor. In my earlier post, I concluded that in a general market collapse averaging down on your best stocks can be a great idea. Facebook sold off during the pandemic, even though it was likely to drive people more, not less, online, and it turned out to be a great buy. But when a single stock you own is down sharply, it is a good time to recheck your thesis before averaging down: the market may see something that you don’t.

The Four Most Dangerous Words Are ‘This Time It’s Different’ — In A.I. Can Never Replace Me, I discussed how experts in different fields rely on pattern recognition to make quick decisions.  For example, chess grandmasters don’t analyze a board by looking ahead many moves, but by running the position through the thousands of games they have stored in their memories. Similarly, fund managers who have made thousands of trades ought to have better pattern recognition than armchair investors, who are more likely to repeat their mistakes. On the other hand, a quality investment professional should have the confidence to argue that while a given situation closely resembles a prior one, this time it really is different. So, while it is true that the four words are dangerous, ignoring them can be a source of investment success.

You Buy Your Portfolio Every Day — This saying, one that James Cramer often uses, I rate 100% true and 80% irrelevant. No one is going to turn over their positions daily or even monthly; in fact, the urge to rebalance costs people a lot of lost profit, as they trim their winners and add to losers. (Are you glad you sold some Apple a few years ago and bought more Intel? I thought not.) I’m not even considering the costs and tax consequences of over-trading. There is in fact such a thing as “Holds,” which make up most of a portfolio at any given time. That said, the adage is useful to the extent it means that it’s never too late to buy a stock you think still has upside, or to do the opposite and sell even after it’s down.

Be Fearful When Others Are Greedy and Greedy When Others Are Fearful — This quote comes from my investment hero, Warren Buffett, so I have to rate it true. The problem is identifying fear and greed. Were people fearful when they sold U.S. stocks in early 2008, or were they rationally assessing an unfolding crisis? And have they been greedy since 2009 for holding onto U.S. stocks, or rationally evaluating our economy and markets? Maybe Buffett knows, but he ain’t saying.

Cut Your Losers and Let Your Winners Run — Sounds good to me. I think when I finish writing this line I’ll adjust my sling, take a Tylenol, and go sell some losers.