Six Wall Street Moves You Should Never Emulate

Six Wall Street Moves You Should Never Emulate

 Key Takeaway: You should never try to emulate Wall Street investors who have a history of repeating these bad mistakes:



Six Reasons Why the Average Person Underperforms In Investing

Key Takeaway: You should never try to emulate Wall Street investors who have a history of repeating these bad mistakes:

1) Arrive at the wrong time

When does the average person show up to invest?  Is it when assets are cheap or expensive?

The average person shows up when there has been a lot of news about how well an asset class has been doing.  It could be stocks, housing, or any well-known asset.  Typically the media trumpets the wisdom of those that previously invested, and suggests that there is more money to be made.

It can get as ridiculous as articles that suggest that everyone could be rich if they just bought the favored asset.  Think for a moment.  If holding the favored asset conferred wealth, why should anyone sell it to you?  Homebuilders would hang onto their inventories. Companies would not go public — they would hang onto their own stock and not sell it to you.

I am reminded of some folks who decided to plow money into dot-com stocks in late 1999.  Did they get to the party early?  No, late.  Very late.  And so it is with most people who think there is easy money to be made in markets — they get to the party after stock prices have been bid up.  They put in the top.

2) Leave at the wrong time

This is the flip side of point 1.  If I had a dollar for every time someone said to me in 1987, 2002 or 2009 “I am never touching stocks ever again,” I could buy a very nice dinner for my wife and me.  Average people sell in disappointment thinking that they are protecting the value of their assets.  In reality, they lock in a large loss.

There’s a saying that the right trade is the one that hurts the most.  Giving into greed or fear is emotionally satisfying.  Resisting trends and losing some money in the short run is more difficult to do, even if the trade ultimately ends up being profitable.  Maintaining exposure to stocks at all times means you ride a roller coaster, but it also means that you earn the long-term returns that accrue to stocks, which market timers rarely do.

3) Chase the hot sector/industry

The lure of easy money brings out the worst in people.  Whether it is tech stocks in 1987, dot-coms in 1999, or housing-related assets in 2007, there will always be people who think that the current industry fad will be a one-way ticket to riches.  There is psychological satisfaction to be had by buying what is popular.  Everyone wants to be one of the “cool kids.”  It’s a pity that that is not a good way to make money.  That brings up point 4:

4) Ignore Valuations

The returns you get are a product of the difference in the entry and exit valuations, and the change in the value of the factor used to measure valuation, whether that is earnings, cash flow from operations, EBITDA, free cash flow, sales, book, etc.  Buying cheap aids overall returns if you have the correct estimate of future value.

This is more than a stock market idea — it applies to private equity, and the purchase of capital assets in a business.  The cheaper you can source an asset, the better the ultimate return.

Ignoring valuations is most common with hot sectors or industries, and with growth stocks.  The more you pay for the future, the harder it is to earn a strong return as the stock hopefully grows into the valuation.

5) Not think like a businessman, or treat it like a business

Investing should involve asking questions about whether the economic decisions are being made largely right by those that manage the company or debts in question.  This is not knowledge that everyone has immediately, but it develops with experience.  Thus you start by analyzing business situations that you do understand, while expanding your knowledge of new areas near your existing knowledge.

There is always more to learn, and a good investor is typically a lifelong learner.  You’d be surprised how concepts in one industry or market get mirrored in other industries, but with different names.  One from my experience: Asset managers, actuaries and bankers often do the same things, or close to the same things, but the terminology differs.  Or, there are different ways of enhancing credit quality in different industries.  Understanding different perspectives enriches your understanding of business.  The end goal is to be able to think like an intelligent business manager who understands investing, so that you can say along with Buffett:

I am a better investor because I am a businessman, and a better businessman because I am an investor.

After all, you are investing money.  Should that be easy and require no learning?  If so, any fool could do it, but my experience is that those who don’t learn in advance of investing tend to get fleeced.

6) Not diversify enough

The main objective here is that you need to only invest what you can afford to lose.  The main reason for this is that you have to be calm and rational in all the decisions you make.  If you need the money for another purpose aside from investing, you won’t be capable of making those decisions well if in a bear market you find yourself forced to sell in order to protect what you have.

But this applies to risky assets as well.  Diversification is inverse to knowledge.  The more you genuinely know about an investment, the larger your positions can be.  That said I make mistakes, as other people do.  How much of a loss can you take on an individual investment before you feel crippled, and lose confidence in your abilities.

Always Put Yourself in a Position of Strength versus Your Competitors

Remember, the main point is to structure your investing affairs so that you can think rationally and analyze business opportunities without panic or greed interfering. You never want to be in a position, financially or emotionally, where you are forced to be a seller in a buyer’s market, or a buyer in a seller’s market.  Set yourself up to have staying power and you will, over the long run, beat your competitors in the market.

By the way, the list of competitors includes a lot of big money Wall Street investors.  But you don’t have to reflect very long, or think back very far – to the tech stock bubble in the late 1990’s, or the real estate bubble and financial crisis in the last decade, or to the rebound which most missed out of fear – to see that Wall Street has a long history of making these very mistakes.  You should never fall into the trap of emulating Wall Street.

 

 

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