Investment Insights: July 2015
Sound Advice or Advice that Sounds Good?
Hello and welcome to this month’s edition of Investment Insights.
In our first e-mail of the financial year we are taking a step back in time to an article that was originally written in 2004, but the premise remains the same. The author, Jason Zweig, is a financial journalist who was required to write about the “stock of month”, the hot new fund manager or whatever happened to be the flavour of the month in financial circles. The problem for Jason, was that he cared about his readers as he knew that many of them would likely make an investment decision based on what he wrote about. As a result he adopted a number of principles that he applied to all of the topics he wrote on which we think provides great insight into how one evaluates their potential investments.
- “If it sounds too good to be true, it probably is” is false. If it sounds too good to be true, it definitely is.
- Never recommend anything to your readers that you would not invest in yourself.
- Be a pathological skeptic. Ask: If this is such a great idea, how come no one else thought of it before? If this is such a great idea, why on earth would this person tell anyone about it? After paying the costs of trading and taxes, will this “strategy” still “beat the market”? What is the past track record of other people who have tried similar approaches? If this turns out not to work, how much money could my readers lose? If I read this company’s financial documents properly – from back to front, as if they were written in Hebrew – what troubling details can I find in the fine print that my readers might miss?
- As the great Benjamin Graham taught, stocks have prices; companies have value. Buying a stock because its price has been rising – but without investigating the underlying value of the business – is like buying a house without ever stepping inside.
- The only thing that never suffers a bear market on Wall Street is stupid advice. You must root it out and expose it – by talking to the smartest and most contrary people you can find, by studying the history and psychology of the markets, by mastering the numbers yourself and by testing them against the basic laws of statistics.
- The human brain is hardwired to perceive “predictable” patterns in data that is, in fact, totally random. Nearly every “market-beating” strategy ever devised is based on the delusion that a temporary hot streak will persist into the future.
- The best way to silence a market forecaster is to ask for the complete record of all his/her past forecasts. The best way to keep yourself humble is to track your own forecasts.
Daniel Minihan, our Director of Wealth Management, has written many pieces that talk about the same principles, the most recent of which was in the past month during the Greek “Crisis”. As Daniel points out, if you ignore all of the noise and hysteria in the news, the actual numbers tell a completely different story.
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