Investing literature is full of old adages that make becoming the next Warren Buffett sound about as difficult as brushing your teeth.
Indeed, the catchiest have become clichés.
And so you’ll hear the same phrases trotted out time and again on social media – especially by pundits during moments of crisis in the markets.
Yet pay attention and you’ll notice that most of these supposedly obvious investing truths are 100% contradicted by another one that’s just as popular!
Here are three bits of head-to-head wisdom where you might be tempted to toss a coin instead for guidance.
#1: “Run your winners” versus “You’ll never go broke taking a profit”
You buy a share, and it rises 50% in three months.
Nice going slugger! But what do you do now?
On the one hand, you could recompute the fundamentals of the business to see how the valuation stands at the higher price, versus the progress in its operations.
Or perhaps you could focus on that progress. Is your investing thesis coming to fruition? Is the price rise warranted by superior newsflow from the company?
Alternatively, you could turn to your Little Book of Investing Clichés, which reminds you that – allegedly – you’ll never go broke taking a profit.
So you go to sell, but then you remember skim-reading an earlier entry – one that urged you to run your winners!
It’s quite the dilemma.
Obviously I don’t believe either mantra should guide your next move.
It’s true running your winners is often a good idea. One infamous study found just 4% of all US stocks delivered all the long-term gains that saw equity investing beat buying US bonds. So you would have wanted to hold those rare huge winners as they multiplied over and over again, just to keep up with the market.
In contrast, selling anything that goes up could be a terrible strategy. Because we all buy stocks that go down too, and if you keep cutting the gains from the ones that go up while holding the losers, then your portfolio could go backwards.
Then again, you might argue that 96% of companies in that study didn’t deliver those all-important gains over the long term.
With those stocks, you might have done better to snatch whatever profit they delivered when you could and then move on, looking for the multi-baggers.
Oh well, nobody said investing was easy. Except perhaps the person who compiled the Little Book of Investing Clichés.
#2: “Sell in May and go away” versus “Time in the market is more important than timing the market”
Curiously, the old rhyme “Sell in May and go away, come back on St Leger’s Day” has some validity.
Over the very long term, the stock market does tend to be deliver higher returns between November to April, compared to May to October.
But before you shut down your share portfolio for the summer, I’ve caveats!
Firstly, while this so-called seasonal effect has been found to generally hold in both the US and UK market when looking at the historical record, that’s not a guarantee it will hold in the future. Nor that it will apply in any particular year.
You could easily liquidate your stocks and miss out on a sizzling summer market.
Secondly, the stock market actually tends to go up over both six-month periods.
Yes, it has tended to do better in the cooler months, but there’s no need to sell up in May, given that often you’ll see gains in the months running up to October, too.
Hence, I much prefer the second aphorism, despite the data backing up the first.
Rather than fretting with trading your portfolio based on nursery rhymes and the calendar, focus on buying and holding good stocks – or an index fund – for the long term. Add new money when you can, invest steadily over the years.
And let time and compound work their magic.
You’ll have lower trading costs, you won’t miss out on rallies – and you’ll have a more peaceful life.
#3: “Don’t look for the needle in the haystack. Just buy the haystack!” versus “If you really know businesses, you probably shouldn’t own more than six of them”
To mix things up, my last example doesn’t pitch two snappy catchphrases against each other. Rather, it’s a head-to-head from two widely quoted investing legends.
The first comes from John Bogle. It’s a call to invest in the stock market tracker funds that – as the founder of Vanguard – Mr Bogle did so much to popularise.
The second quote is from Warren Buffett. As one of the world’s richest people who got that way entirely on the back of investing, maybe you should listen?
It’s another tricky one.
The data suggests most people will fail to beat the market over the long term. That favours John Bogle’s index fund investing.
Yet, we would never have even heard of Warren Buffett if he’d invested in index funds, had they even been available when he started.
Buffett is living proof of the potential power of picking stocks.
Yet these two market mavens aren’t really at loggerheads. Note that Buffett is saying that those who “really know businesses” are the ones who should own just half a dozen companies.
Given that Buffett’s instructions in the event of his death is the money left to his wife, Astrid, should go into index funds, I’d say he and Bogle are really on the same page.
If you’re ready to dig deeply into businesses and to make investing your passion – and you’re prepared to risk doing worse than the stock market in the quest to do better – then Buffett has shown us one way to get there.
But most of us should probably put at least some of our money into Bogle’s beloved index funds all the same. Because when you already own a chunk of the haystack, it’s less risky to then go hunting for a needle.
Come to think of it… maybe diversification works just as well with investing aphorisms as it does for stock portfolios!
