Yet More Investing Truisms
Investment truisms – wisdom passed down through generations of traders – are often quoted on Wall Street, in my experience mostly when they support a course of action that the quoter has already decided upon. I’ve assessed the accuracy of these sayings in previous posts, here and here, but I keep thinking of more. Here’s the latest batch.
Buy at a Price, Sell at Market
This one was told to me by Fred Berliner, a NASDAQ veteran who launched the Russian version in the 1990’s.1 The principle is that you can be picky about the entry price for a position, but once you’ve decided to sell, you should get out quickly without using limits. I rate it 70% true on the buy, and 90% true on the sell.
Buying: If you’ve done your research, you should have a price range that makes the stock attractive; or if you’re a momentum trader, a technical entry point. It makes sense to be disciplined and wait for the fat pitch, as Buffett would say.
I rate the truism only 70% because in emerging markets or speculative sectors, stocks can move fast and run away forever. If you’re playing for big gains, the exact in-price is less important. Most active investors have a story about how they had a limit order to buy X, it traded one tick above, they missed it and look where it is now. Boohoo, pour another Jameson’s bartender, in the same glass is fine.
Selling: Fred rarely called stocks by their names, but “puppies” or even “pieces of crap.” Like any good trader, he was avoiding attachments. The hardest thing in investing is to exit one of your former big winners, especially after it’s down from its high. If you’ve cleared that emotional hurdle and decided it must be sold, you’re probably right, and you should do it quickly at market. I’ve experienced the torture of using limits, watching the stock trade below them, lowering the limits, below again – and finally puking it even lower.
Take your favorite stock out back and shoot it, is another way of saying it.
Sell When You Can, Not When You Have To
When I was a young lawyer, my boss had a friend named Bob Spiegel, who was a Salomon Bros. investment banker and part owner of a profitable singles-oriented restaurant/bar on the East Side. We would go to lunch and he’d discourse on finance in a language that was new to me, as a 26-year-old former English major, e.g., “EBIT,” “pretax income,” “accelerated depreciation.”
Spiegel was a fount of market wisdom. Having been around long enough to see his peers blown up in stock market and real estate crashes, his mantra was, “Sell when you can, not when you have to.” I rate it true, to the extent it means that you should always stay ahead of potential cash needs. In my personal finances I’ve heeded Sensei Spiegel, always living well below my means (and debt-free since Jan. 1998), but in one of our funds I did have the experience of a liquidity squeeze. I didn’t enjoy it.
In the early stages of the 2008 crisis, we failed to sell enough to prepare for all the fund’s likely outflows, given that it had monthly liquidity, and for a number of our investors was among their readiest sources of cash. The fund survived, but the problem with selling assets in distressed conditions is that buyers only bid for the best stuff, and at discounts to intrinsic value. A portfolio put through that wringer will have its long-term value impaired.
On the other hand, to the extent Spiegel’s truism is interpreted to mean that you should always be taking profits, I reject it. As I’ve written, including in my first Substack here, one of the biggest investing mistakes is to continually “trim” your champion stocks, if they remain champions. But if they or circumstances have substantially changed – think Xerox and Kodak – take them out back and shoot them.
Don’t Fight the Fed
This is the kind of saying that seems truer than it is in practice. For example, the Fed was raising rates from 2003 through 2006, yet global stock markets were rising the whole time. The Fed was reacting to above-trend U.S. growth driven by macro factors including China’s insatiable demand for commodities, and a real estate bubble — which same factors were powerful enough to keep the market party going for years after the rate hikes had started.
If you didn’t “fight the Fed” in 2003-06 you missed out on a 50% gain in developed stocks and 200% to the peak in the MSCI Emerging Markets. Of course, in hindsight the Fed’s withdrawal of liquidity was slow-acting poison for most financial assets, which finally collapsed in 2007-08. (Junior mining stocks, the most hyped, began to crack first, in mid-2006: appropriately, they were the canaries in the coal mine.)
I would therefore revise the truism to “Don’t Forget the Fed,” since what they’re doing will impact financial assets, sometimes sooner and sometimes not for a while.
Focus on Investment Process, Not Results
This is heard a lot in the value investor community, where disciplined people do extensive research and argue their cases persuasively, yet performance so often disappoints. I find it irritating.
The concept of “process over results” applies best to areas like gambling. My late partner and friend Brom Keifetz, a professional sports bettor, knew he’d have a lot of bad beats but also knew that over time his data-driven system would come out ahead, as it did.
But a poker or hockey game is essentially a closed system, where the main uncontrollable variable, luck, should be overcome after enough bets. Stock markets, by contrast, are subject to many variables, and luck is only one. Super System by Doyle Brunson is worth reading for poker novices, whereas since Benjamin Graham’s The Intelligent Investor (1949), books claiming to have systems to beat the market seem to me useless.2
Also, Brom was betting his own capital, whereas most fund managers work with outside money. A manager with a robust process may well outperform in the long run – but there may not be one. When Firebird had our first major loss, in 1994, I was on the phone with the portfolio manager from one of our investors, an Australian bank. I started to say, “Our strategy is –” and she cut me off, shouting in a heavy accent, “I know your strategy, and I think it’s cock!” That bank and that manager (whose name I still remember) were long gone by the time our process began to really work.
I myself am a passive investor in several funds where I’ve been patient for years – 17 years in one fund, supposedly run by the best of breed in Brazil – and have seen zero results. I prefer not to speak to the managers, because if they started to explain their “process,” I might shout, in what sounds to them like a heavy New York accent, “I know your process, and I think it’s galo!” (Cock in Portuguese, per Google.)
At the end of the day, money management is about performance. Investment processes may reward patience, but consistently mediocre results require reevaluation of whether the process makes sense in the prevailing markets.
Finally, this all reminded me of a story in Debbie Harry’s memoir, Face It. Contrary to Blondie’s origins in the punk scene, for their second album they were assigned an Australian hitmaking pop producer named Mike Chapman. Chapman said, “If you’re going to be in the music business, you gotta make hit records. If you can’t make hit records, you should fuck off and go chop meat somewhere.” Soon after that, Blondie released the single “Heart of Glass,” which went to #1.
I posted this this morning and emailed a copy to Fred, as I thought he’d enjoy it. I just found out that he died last night. He was a great guy and I’ll write some more about him in the future.
Books that teach investor psychology, like Housel, The Psychology of Money, and Zweig, Your Money and Your Brain are worthwhile though.