Investing Using Slogans
The appeal of sound bites and catchphrases in investing makes sense to me. The best ones can take years of financial research and experience and squeeze it into one quip. I think that’s why they seem to resonate with the average investor. You could also argue that our attention spans are reduced to nothing so anything that goes beyond a few seconds gets ignored. That includes this blog!
It’s also been proven that more academic knowledge of financial markets doesn’t translate to superior market performance. Even highly experienced Wall Street veterans can’t consistently beat the market. But maybe that shouldn’t be the point.
What I found in all these quotes was the absence of market beating advice. They all touch on the investors’ own individual goals. The advice is so broadly universal that most people would be better off following it. That’s what made most of these quotes enduring, except for HODL below. The focus shouldn’t be trying to beat the markets, rather the focus has been on limiting mistakes.
“Buy low, sell high” – Some investment guru
The phrase makes sense in any line of business, especially investing. Investors are owners of an asset that they would like to sell for more in the future.
My issue here is what the hell is the definition of buying low. Obvious buy lows were Paypal, Meta and Netflix in 2022. You can see in the chart below where buying these stocks after a 50%+ sell off in seven months was a no brainer now, it wasn’t the case in the moment.
You are in a very good place now if you were brave enough to buy during those 2022 lows. Netflix had serious questions about subscriber growth, retention, and password sharing. Meta was burning piles of cash trying to make the Metaverse a thing. And PayPal has yet to rebound, proving that buying low can take longer than one year to pay off.
What about sell high? Meta bottomed in November 2022 at $90/share. It jumped to over $180/share the following February. Over a 100% return in four months! Who isn’t selling? Well, if you held on, it reached over $483/share as of February 15th, 2024.
That’s the problem with “buy low, sell high” in a vacuum. If that was your one investment strategy, you’d be missing out on several key factors like what’s low priced and what’s high priced. That’s an all pretty objective from a backwards looking perspective. I can now tell you today that Meta in November 2022 was priced low. However, in November 2022, Meta had serious questions left unanswered like the floundering Metaverse and ungodly amount spent on virtual reality. I have no clue if today’s price is too high or if there is more potential upside. Valuations look stretched but Meta could possibly still live up to the high expectations currently priced into the stock.
“Be greedy when others are fearful” – Warren Buffett
This quote is also easier said than done when you’re in the trenches of a sharp sell off. It only makes sense after the fact when skies are clear and optimism is back. It also implies that when shit hits the fan, you’d be the one with a level head.
Being greedy when others are fearful also relies on personal and systemic capabilities. In “The Great Depression: A Diary”, the author Benjamin Roth constantly muses about not being able to buy stocks low because his own business as a lawyer had ground to a halt. He had no money to buy stocks low. During the Great Depression, cash was not easily accessible. So even if you had a balance of cash with your bank, most people couldn’t make withdrawals.
Like the “buy low, sell high” point, what is the level of fear that causes you to start buying hand over fist? If you lost your job, would that level of fear be heightened? Should you start buying stock after losing your job?
One assumption is to always have investible dollars on the sidelines for when fear is heightened. It implies a market timing component that almost no one is good at on a consistent basis. Holding excess cash in your investment account may act as a drag on performance relative to just staying invested for the long-term. Steep market sell offs are rare so those cash reserves could stay idle for years to come.
Now let’s flip it to being fearful when others are greedy. In other words, when the market is expensive. Using a price to earnings multiple (how much premium is being paid for each dollar of profits) can be a useful guide to fundamentally price the market. It is a horrible predictor of market moves.
Dating back to 1994, the average forward looking price to earnings multiple is 16.62x or 16.62 times premium paid for every dollar of profit. This barometer bottomed out at ~9x in 2008 when we were living through the Great Financial Crisis. If you only invested when the market was “really cheap”, you would’ve bought in 2008 and between 2010-2013 or about 13% of the last 30 years. If you loosened your standards and invested when the market was priced below average, you would’ve been invested for about 10 years out of the last 30 years. Being invested a third of the time because you are afraid of an “expensive” market provides suboptimal returns.
"The stock market is filled with individuals who know the price of everything, but the value of nothing." — Phillip Fisher
This has been my mantra. Everyone knows the price of Meta but no one really knows what it’s worth. Is $500/share expensive? That’s really the question investors should ask from a forward-looking perspective. The past shouldn’t matter too much if you assume all available information is priced in. So, buying a stock that has run up could go higher if the company can continue to grow profits. The reverse can also be a consideration where the thesis points to the stock going down.
You purchase a stock for its future prospects, not necessarily because of where it has been. Just be leery of people who are so certain of a stock moving up or down because they simply don’t know.
HODL (Hold on for dear life) – Wall Street Bets
I don’t know the true origin of this phrase but it gained steam during the Gamestop run up. Retail traders from the Reddit group “Wall Street Bets” bought Gamestop shares. So much so that they created a short squeeze, leaving any investors shorting the stock having to scramble to cover their positions.
The stock didn’t have a straight line up. It was extremely volatile and caused lots of stress for anyone in the trade. That’s where the phrase HODL comes in, the Reddit community encouraged each member to hold on to the stock for dear life.
If peer pressure was an investment strategy, this would be it.
“Get Invested, Stay Invested” – Hao Dang, probably stolen from someone he heard it from
I know this may not be easy as it sounds either. There is planning and proper sizing required to make this (and really any) investment work.
First: Don’t invest every single dollar if you did not set aside a cash balance for living expenses. The market tends to move up the majority of the time but when rent comes due, a volatile asset like stocks will make your cash flow unpredictable.
Second: Be diversified. The key to long-term investing success is compounding gains. Diversification helps limit mistakes and could help protect against single stock risk. Just ask any Enron employee.
Third: Peek at your investments to make sure they’re in balance. While I don’t think it’s a good idea to constantly look at your portfolio, you should at least be on the lookout for potential landmines. If your risk tolerance is moderate but your portfolio is mostly stocks because of appreciation, it’s time to rebalance.
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