If you’ve been investing for a long time you will hopefully have made several good investment decisions, but you most certainly have made some decisions with poor results (even if they were based on sound, positive information). And then there are just plain, bad decisions, for which I’ve made my share. During that same timeline, you’ve likely read and/or verbally received all sorts of investment information and advice from various sources. How does one sort the wheat from the chaff (Matthew 3:12) in order to avoid the unfortunate decisions and gravitate towards the good ones?
Wish I was smart enough to tell you.
Lacking that, I can at least entertain you with comments, advice, and “conventional wisdom” collected over the past half century and give you my best take on them. I’d like to believe this is how one develops real investing wisdom and perhaps critical thinking skills (ah, critical thinking….excellent subject for a future post).
There are several ways to define Conventional Wisdom. Generally, it is based on some socially-arrived-at assumptions about reality, and is rarely scrutinized for accuracy. Conventional wisdom is often akin to accepting facts based on faith. Its accuracy can depend on the situation and circumstances, and can change over time (see “Betterhelp.com” link below). It (CW) might actually be right most of the time.
https://www.betterhelp.com/advice/wisdom/conventional-wisdom-what-it-means-and-when-to-use-it/
Some investment-related examples:
- “Buy on the Dip“, or perhaps better understood as buying a given stock/bond/mutual fund/ETF after it’s recently gone down in value. In many cases this may not be a bad short-term investment tactic. Problem is, unless you’ve studied the given investment to determine it’s fundamental health as a business, you don’t know if you’re buying something that’s on its way to going out of business.
- A related coined phrase: “Buy low, sell high“. This is a great investment philosophy, as long as you know there’s going to be a “high” after you’ve “bought low”.
- Wish I could find the source, but I recently read this similar statement of the obvious: “Nobody ever went broke selling stocks at a higher price than what they paid for.” The challenge is actually doing just that.
- Want to get a little insight into the challenges associated with buying low and selling high? Check out Morgan Housel’s “The Philosophy of Money”.
- “A great company isn’t always a great stock.” This is a quote I heard in the past week, and quite honestly, it motivated me to write this post. If true, it explains why having sound, positive information on a business doesn’t always result in a money-making investment. Said another way, a company’s stock price doesn’t always reflect the quality of the company- certainly a possibility in the short term. There are lots of ways for a high-quality company’s stock price to sink even when business is good- and it’s most likely going to be a short-term drop in stock price.
- “Past performance is no guarantee of future results.” OK, this is a Securities and Exchange Commission (SEC) – mandated disclaimer, and it’s certainly a wise statement to keep in mind when managing risk related to investment decisions. At the same time, the last 25, 50, 75, and 100 years of US stock market history show that investments there have had strong, positive growth over the long term (accompanied by some hairy short term downslides). Nevertheless, you have to admit this statement holds up as wise.
- “It’s different this time.” Often heard as an opening statement to describe a market downturn. Investment commentators make their living by writing investment stories, accurate or not. When a commentator starts a story with this line, they’re probably going to explain why this downturn is going to last longer, last shorter, recover differently, etc. By the time we learn whether the story is accurate or not, we’ve forgotten about the story. If accurate, the commentator will make sure to remind you (“As I foretold in my last article on the subject…..”); if inaccurate, no one’s likely to remember who wrote it. My opinion- it’s different every time. A related pitch is next.
- Interestingly, I’ve never heard this quote when referencing an upturn in the markets.
- “(This person) called the (COVID Pandemic downturn, the DOTCOM bust, the 2008 market drop, the 1973 oil-embargo stock market drop, the 2022 bear market, or any other significant market drop).” You’ll see this introductory comment all the time, the implication being that this person was smart enough- and the only one- to see a major stock market drop ahead of time, and they’re about to predict the next big drop. The problem is that someone could have predicted a major downturn two, four, five or more years ago, and they can (and will) claim to have accurately predicted it. Since 2018 I’d been telling my son the stock markets are going to have a major correction soon- well, I certainly called last year’s 20% drop, didn’t I? Very glad he didn’t act on my forecast….
- “The 60% stock/40% bond retirement portfolio is obsolete“. You’ll also hear the same claim about the 4% retirement withdrawal rate (see post #55). These are two easy targets for investment commentators who want to introduce their new retirement investment strategy. So, did the 60/40 retirement nest egg ratio lose a bunch of money in 2022? Yes, just like almost every other portfolio in 2022. Is it obsolete? Probably not- won’t know for sure for perhaps another 10+ years.
Collectively, these last three examples can be addressed with the following 2011 quote from former Merrill Lynch strategist Richard Bernstein, who warned investors: “Today’s investors find it inconceivable that life might be better without so much information. Investors find it hard to believe that ignoring the vast majority of investment noise might actually improve investment performance. The idea sounds too risky because it is so contrary to their accepted and reinforced actions.”
Investment noise- now that’s a great way to describe the collective investment media content.
https://www.cbsnews.com/news/9-bits-of-conventional-wisdom-you-should-ignore/
Finally, one last bit of investment conventional wisdom. If someone tells you that a given stock is a “can’t miss” investment guaranteed to get you double-digit returns, cross them off your list of reliable information sources.
Would love to hear other examples of investment conventional wisdom, accurate or not.