I like writing macro-style articles every time I continue to learn things from my ongoing relationship with the market. Even more so, I like conveying these lessons and tools to other investors, as passing around knowledge is the best way for everyone to get on the same page. Also, it's a great way for us to make sure that we don't forget some of the age old lessons of yore that we may have looked over in our many years of trading.
Here are three basic lessons that I revisited personally, through experience last week. I realize these are often overlooked, so wanted to list them here in order to refocus those of us that have lost grasp of them.
1. Realize there is Always Risk
Risk becomes very apparent when you're dealing with companies starting out in emerging markets or companies whose success relies on a product that hasn't been launched yet. Risk is usually very easy to remember with companies that are approaching binary events like earnings calls or FDA approvals.
It's much less apparent when you're dealing with companies like Apple (AAPL), Proctor & Gamble (PG), 3M (MMM) and other large caps. While the risk of certain events taking place (i.e. bankruptcy, dilutive private placements, etc.) may be less, each company still carries with it its own risk. Regulators could launch investigations, a place in the supply chain could stop producing, a global economic crisis could effect international business. These are examples of things that happen all the time to public companies.
Apple is a perfect example. How could anyone imagine a company as fundamentally sound as Apple, getting ready to punch through all time highs, as a company that was about to take an almost 50% haircut a few months ago? Apple had the growth potential, it had avoided chaos during a CEO switch, and it had more in the bank than most 3rd world countries. People with no grasp on risk, like Andy Zaky, let the money and the profits blind them and were subsequently wiped out (in Zaky's case, taking people down with him). SA contributor and all around high quality individual Ashraf Eassa did an awesome job on telling people how to learn from Zaky's mistakes. Ashraf says:
You can and will be wrong whenever you make investments. It's that simple. When it comes to the stock market, nothing is a sure bet. Sure, there are some things that have fairly high/low probabilities, but never discount the fact that you could be dead wrong. Even if you're 100% right about the fundamental drivers, you can still totally screw the pooch on what multiple the market is willing to pay for the stock.
Mr. Zaky wasn't necessarily wrong that Apple would keep pulling in massive cash flow, but he was wrong on both the technicals/sentiment as well as the uncertainty of the future of the fundamentals of the company. When the latest guidance was issued, things looked ugly. Margins coming down, revenue growth slowing, and worries of competition became more evident than ever.
He then points out:
You know what Andy Zaky's problem was? He ran a hedge fund but did precisely zero hedging. Not only did he not hedge, but he was levered to the teeth betting on a single direction. I mean, heck, why didn't the guy just take all of his investors' money and go to Vegas?
Although this is an extreme example, it's a stark reminder that every stock and every position has risk. Risk runs commensurate with reward; that's how the markets work. Remind yourself about risk often, whether you're investing in large cap dividend income stocks or over-the-counter penny stocks. Risk is everywhere.
2. Constantly Reassess Your Investing Team
One of the toughest and hardest lessons I learned as a young investor was to trust my own instincts. I wrote about this in my article "My Definitive 17 Cardinal Rules for Investing Success":
This was the first and most devastating lesson I ever learned. The first time I ever made an investment was thirteen years ago when I walked into my local A.G. Edwards office with a pocket full of $1,700 in cash and asked a typical, middle aged, greasy looking broker to put it all into a company that I picked. It was a company that I had loved and adored for years and even though it was going through hard times; it was a product I used and a CEO that I believed in. It was a company I would eventually go on to work for a couple of years later.
At this point in my life, I knew nothing of investing, and I let this broker talk me into putting my money into the QQQ index fund and two other companies aside from the one that I wanted in. He claimed the company that I wanted all of my money in was in turmoil and ruin, a terrible investment. I argued for the company, defending their recent product line and CEO change. But, knowing precisely nothing about the market aside from the fact that there was a company that I supported and wanted to help out, I listened to him. $200 in commission later, I walked out of the office, already down over 10% without even knowing it. I made barely any money on what I held and cashed out several years later.
Need a reminder to trust myself that I carry on an everyday basis? At the stock's 52 week split adjusted high, my $1,700, if left alone for 13 years would have been worth an astounding $470,000. That's 453,000 reasons that I remind myself to trust decisions. On the heels of that, I remind myself daily that no one knows what the market is going to do definitively. It's a mystery that we're all trying to decode, but what you should take from this story is this one simple fact:
If all of these people out there can find success in the market, you can too.
The point is that since then, I haven't advocated using a broker for personal investors. For middle to upper class people that manage their own money, online brokerages have made it extremely easy to be 100% in control of your portfolio, paying just nominal brokerage fees for commissions. If you consider yourself to have somewhat of a decent financial education, you probably think like I do: why pay someone else to manage my money when I can do it?
Unfortunately (or fortunately, for RIAs) there are a sect of individuals in the world that either have:
- more money than they can possibly manage
- not enough time to actively manage their own money
- the money management IQ of one (1) Alaskan king crab
So, in that regard, these people need to have someone manage their money. If you fall into this category remember to stay on top of the people that are looking after your investments. Constantly assess and then reassess what they're doing and what returns they're providing you compared with other entities.
Remind yourself, they are providing a service and you are a customer. They are paying themselves out of your nest-egg, which is easy for some people to forget about when management fees are simply deducted from an account that is making money. If you're taking losses, maybe it's time to reassess. If you're making money, maybe you're not making enough -- reassess again.
Just as you would when going to buy a car, demand you get the absolutely best performance for your dollar. Keeping a fresh attitude about refocusing and reframing how you look at the people managing your money will ultimately lead to your advisers paying more attention and your personal yields increasing.
3. Don't Over-Think Things
In many of my articles I stress how important it is to aggressively monitor your investments. I've written in the past:
The ever prolific and eloquent hip hop artist Snoop Dogg once thoughtfully quipped the following well thought out financial statement:
"I've got my mind on money and my money on my mind."
Though I'm not quite sure that Snoop Dogg has a firm grasp on how his 401k may be currently performing versus the Lipper average, he's got the general idea down.
As an investor, you need to be on top of what's happening with your positions every single day. Ever look at a trading desk picture and think that 15 monitors is a bit overdone? It's not. There's infinite sources of news and analysis on the positions you hold, and your job is to let that information all permeate your head on a daily basis. Know what your company's chart looks like, know the latest SEC filings inside and out. Know what their latest press release was, what their average volume is, and how they're trading in relation to all of that right now.
Know that as you sleep, things are taking place overseas that are going to shape the way that your investments react the following day. In other words, keep your mind on your money and your money on your mind.
So, here's the guy who once told you to aggressively monitor your investments now telling you that you don't have to watch every single second of trading.
You have to remember, there is a psychology behind investing. People sell when they get scared and go bullish when they're feeling comfortable. Some of my best trades have occurred on days when I've picked up from the trading desk to go drive a couple golf balls out my back door and let 15 or 30 minutes go by without watching a ton of tickers in real-time. Other times, if I'm watching and waiting for an entry/exit point in real-time and its just not happening, I'll set a limit order and go in to the next room and relax for a few minutes before getting back at it.
More than once I've sold for bigger profits than I would have gotten out at if I was watching every tick. I know that sounds counter productive, but it works wonders on your mind, which can then be limber for the rest of the trading day.
When you do complete a trade, act with authority. When I sell off a position, the immediate next thing I do is remove the ticker from my foreground ticker. Yes, there's always the great feeling of watching a stock tank after and knowing you sold at the top, but there's also the feeling of selling and watching a stock move much higher. Don't involve yourself with thinking about crap like that. Make your move swiftly, pocket your gains, and move to the next trade.
Remember, if all of these people can make money off of the market, you can too. I hope you keep these tips in mind as we move to a new trading week, and I wish you the best of luck.