Investment wisdom that Marc Faber shares on his Gloom,Boom and Doom website.
What every investor should know....
1. There is no investment rule that always works.
If there was one single rule, which always worked, everybody would in
time follow it and, therefore, everybody would be rich. But the only
constant in history is the shape of the wealth pyramid, with few rich
people at the top and many poor at the bottom. Thus, even the best rules
do change from time to time.
2. Stocks always go up in the long term. Nope, that's a myth.
Far more companies have failed than succeeded. Far
more countries' stock markets went to zero than markets, which have
survived. Just think of Russia in 1918, all the Eastern European stock
markets after 1945, Shanghai after 1949, and Egypt in 1954.
3. Real Estate always goes up in the long term. That's a myth too.
While it is true that real estate has a tendency to appreciate in the
long run, partly because of population growth, there is a problem with
ownership and property rights. Real estate in London was a good
investment over the last 1000 years, but not for America's Red Indians,
Mexico's Aztecs, Peru's Incas and people living in countries, which
became communists in the 20th century. All these people lost their real
estate and usually also their lives.
4. Buy Low and Sell High. Not lowEST and highEST.
The problem with this rule is that we never know exactly what is low
and what is high. Frequently what is low will go even lower and what is
high will continue to rise.
5. Buy a basket of high quality stocks and hold!
Another highly dangerous rule! Today's leaders may not be tomorrow's
leaders. Don't forget that Xerox, Polaroid, Memorex, Digital Equipment,
Burroughs, Control Data were the leaders in 1973. Where are they today?
Either out of business or their stocks far lower, than in 1973!
Comment:
This observation leaves out the time period of holding. Investors
typically holds their stocks from mid(a few months-3 years) to long
term(up to 5 years). Traders hold anything from between 1 minute to a
few weeks at best. I am sure what Marc Faber was observing is that to
buy and sell frequently is more profitable than holding and never
selling. However, this runs contrary to the value investing principle
that Benjamin Graham preached. Graham essentially says that we should
purchase value stocks sold below its intrinsic value, and only sell if
the fundamentals of that stock changes, or it is overpriced. Holding
power is important in value investing. If one were to just buy and not
have the ability to hold akin to contra players, I believe one would
lose a lot of money trading in the long run)
Let's look at what happened to companies which were mentioned above. Why did they die and their stocks tanked :
- Xerox -
Great product(computer), poor marketing leading to its fall. They didn't
believe that computers will one day rule the world, and therefore
allowed Apple,Microsoft and IBM steal the idea and make it big(and own
world dominion). Other interesting read.
- Polaroid -The birth of digital cameras in early 2000 almost killed this company which made instant photography a hit.
Polaroid filed for bankruptcy twice between 2001 and 2009, changed CEOs
six times, and made a trip to hell and back. The business was
transformed and now rose from ashes by leveraging on its strong brand
name. Still, if you were holding its stock in 2001-2009, you'd have been having many heartaches and pondering moments.
- Memorex
-Burroughs bought Memorex and began selling it by bits and pieces. The
value of the company began to fall apart when its money-making division was sold off.
- Digital Equipment
- DEC fell due to its inability to hold its senior executives
accountable for financial performance after the abolition of the
Product Lines in the early 1980s. Another reason was its failure in
changing its business model to become a specialist in an area within the
IT industry, unlike Intel(microchips) or Oracle(database).
On the side note, interesting why Marc Faber only gave technology stocks as examples.
6. Buy when there is blood on the street.
It is true that very often, bad news provide an interesting entry
point, at least as a trading opportunity, into a market. However, a
better long term strategy may be to buy on bad news, which has been
preceded by a long string bad news. When then the market no longer
declines, there is a chance that the really worst has been fully
discounted.
Comment: Check the momentum of the stock.
7. Don't trust anyone!
Everybody is out to sell you something. Corporate executives either
lie knowingly or because they don't know the true state of their
business and the entire investment community makes money on you buying
or selling something.
Comment : Recently the
Malaysian CIMB-RHB-MBSB bank mega-merger deal fell apart due to rumours
ranging from the fact that EPF couldn't vote for the deal and therefore
unhappy, MBSB's loan provisioning practice is looser than the other two
'big brothers'. Officially, the interested parties did not proceed
because the deal did not create value for all stakeholders(minorities
such as Aabar Investments included).
Look at what Mr Nazir has said the day before the deal was officially called off here on 14th January 2015: "He
was non-committal when asked about the current status of the talks
between the three banks, saying that they were still assessing the deal
based on existing terms to determine whether the exercise should
proceed."
So, if you had believed him , you'd have thought that the merger might still have a chance.
He
was non-committal when asked about the current status of the talks
between the three banks, saying that they were still assessing the deal
based on existing terms to determine whether the exercise should
proceed. - See more at:
http://www.themalaysianinsider.com/malaysia/article/nazir-non-committal-on-bank-merger-status#sthash.YwZxOame.dpuf
He
was non-committal when asked about the current status of the talks
between the three banks, saying that they were still assessing the deal
based on existing terms to determine whether the exercise should
proceed. - See more at:
http://www.themalaysianinsider.com/malaysia/article/nazir-non-committal-on-bank-merger-status#sthash.YwZxOame.dpuf"
8. The best investments are frequently the ones you did not make!
To make a really good investment, which will in time appreciate by
100 times or more, is like finding a needle in a haystack. Most "hot
tips" and "must buy" or "great opportunities" turn out to be disasters.
Thus, only take very few investment decisions, which you have carefully
analyzed and thought about in terms of risk and potential reward.
9. Invest where you have an edge!
If you live in a small town you may know the local real estate
market, but little about Cisco, Yahoo and Oracle. Stick with your
investments in assets about which you may have a knowledge edge.
Comment:
Beware though, to have a bias towards the company which you work in,
and might have all the insider news on, creating a blind spot towards
the other perspectives(whether good or bad). Benjamin Graham has
cautioned the intelligent investor many times on this, and advised her
not to invest all eggs into one basket.
10. Invest in Yourself!
Today's society is obsessed with money. But the best investments for
you may be in your own education, in the quality of the time you spend
with the ones you love, on your own job, and on books, which will open
new ideas to you and let you see things from many different
perspectives.
