Is there a magic bullet for investment success? There may be, but once a lot of people know what it is, it will stop working. People will rush in and change the pricing mechanism that created the advantage in the first place.
There may be no magic bullet for investment success, but there are perfectly good magic bullets to minimize your losses.
- Investment opportunities are a bit like movies. If there is lots of hype from the promoter and not much else, it is likely a bad movie and a weak investment. Refusing to buy on hype is a magic bullet.
- Being without the fear of missing out is a magic bullet. You cannot do every good looking deal that comes along. No one has that much money. Given that many good looking deals are only that, doing everything will cost. Warren Buffett has said, “Wealthy people say no to almost everything.” and yet they grow their wealth. None feel bad about the deal they missed.
- Quit quick. Even skilled and well informed people make mistakes. The idea is to minimize the losses. As soon as you now it is not the deal you thought, get out. Nursing losing positions will eventually consume all your capital.
- Don’t fall in love with the inventory. Even deals that have been good to you, eventually will not pass your hurdle rate for investment. They could be very good companies, but not very good stocks. They could have been wonderful at one time, but it is very hard to double the value of a large company. Apple market capitalization is $627 billion. If you buy it with a view to doubling your money, the market cap will need to double too. That increase is about the combined value of Coke, Walmart and Procter & Gamble. If you want the price to double, you have to double the value of the business. A formidable challenge for Apple. As well, very large companies become exposed to government reactions, particularly anti-trust, so be careful.
- The last bullet is “Don’t rely on the past.” Every investment advisor will tell you that the past does not tell us much about the future. Despite that, people see index funds to be a saving form. They are not and I don’t care what history tells us. Historically, index funds beat managed funds because of fees, but that is now out of context. Forty years ago there were none and so the market today, where there is huge capital tied up in index funds, is not the same market as it was. The old relationships do not apply the same way. It is not different than the idea that if I buy stocks late Friday, I can sell that a profit at noon on Monday because day traders don’t want to carry inventory when the market is closed. That will work until others notice. Then it won’t. It is impossible to make money for a long time on anything that everybody knows. Like index funds.
It takes time for market forces to play out and there is no requirement that you be there for the carnage. The first requirement for making money with investments is don’t lose money. Use the defensive bullets.
Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario. In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.
Please be in touch if I can help you. firstname.lastname@example.org 866-285-7772