Conflicts of interest usually tend to nullify advice that is offered in good faith, whether it’s for monetary gain or not. The recipient of the advice wants to believe that conflicts are minimized and their best interests are at the forefront. Often this is not the case within the financial services industry, as the advisor is looking to maximize profits, sometimes at the unnecessary expense of their clients.
Listed below are some of the more notable pieces of advice, (in our opinion) and they all come from people who stood to gain nothing from sharing their expertise. Put differently, conflicts of interest were absent at the time these notables wrote or spoke about how they navigate the markets. Each quote is followed by our commentary to add some more context to their insight.
"The investor's chief Problem – even his worst enemy – is likely to be himself."
Pride comes before the fall, especially when it involves investing. It’s very easy to be overly confident when the markets are going nowhere but up. It’s when things take a turn for the worst that successful investors are made. Whether it’s taking advantage of depressed housing prices, or value averaging on the funds you’re invested in as prices fall, opportunity does exist even when it seems like it’s all doom and gloom. And it’s at these times when the individual investor often makes decisions that are counterproductive to their financial well-being.
Take, for example, the knee-jerk reaction most people have when the market corrects 1-2% on any given day. The immediate inclination is to sell, and sell fast. But when that happens, you essentially lock in losses, and unless your goal is to tax-loss harvest come tax time, your overall return on investment will diminish. Overconfidence is omnipresent among investors, all you have to do is ask someone’s opinion on where they think the market is going and you’re almost certain to receive an answer that does not include the words “I don’t know.” But the reality is no one really knows what the market is going to do. They may make educated guesses, but nothing more. So the next time you want to go with your gut and either buy or sell without careful thought and analysis, you’re probably better off waiting a while lest you become your own worst enemy.
"Trust in time rather than timing."
Continuing with the theme of overconfidence, Malkiel eloquently sums up an important truism when it comes to investing: time in the market is much more crucial than jumping in and out of the market at the right times. The latter simply can’t be done with any consistency or precision. To time the market means you have to know not only the right time to buy, but also the right time to sell. Doing this again and again not only costs money in transaction fees and taxes, but it also takes an emotional toll with the ups and downs that occur even during intraday trading sessions.
There have been numerous days when the market has fallen 15% or more just in a matter of hours, so to exit your position and then re-enter hours, days, or weeks later, is a task that challenges even the most seasoned traders on Wall Street. Contrast the timing of market fluctuations with the amount of time spent in the market and the risk one assumes is certain to decrease. Invest early and often, not erratically and belatedly.
"If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks."
Bogle’s advice is invaluable. He has written extensively on everything from corporate governance to the mutual fund industry and even his incredible heart transplant. We like this suggestion because the investing public should not invest in stocks without being prepared to lose money. It’s similar to walking in a casino, but with games like roulette and blackjack there’s no underlying intrinsic value, other than say for entertainment purposes. With companies, though, over time there’s a greater likelihood that money will be made as opposed to lost because companies produce goods and services; casinos just produce winners and losers.
Bogle’s point is realistic because losing 20% in a matter of hours on a particular stock is not uncommon. But the same can be said for the upside of investing in stocks; fortunes have been made from owning single stocks, not in a matter of hours of course, but certainly over a few years. Just don’t let the upside potential blind you from the downside hazards.
"Both individuals and institutions will constantly be urged to be active by those who profit from giving advice or effecting transactions. The resulting frictional costs can be huge and, for investors in aggregate, devoid of benefit. So ignore the chatter, keep your costs minimal, and invest in stocks as you would in a farm."
The first part of Buffett’s sage advice is a direct attack at the multi-billion dollar brokerage and investment advisory industry. And rightly so. It’s safe to say that in the aggregate, individual investors would be much better off if these industries did not exist. That’s not to say that many people could benefit from having someone by their side who could advise them on what to do with their hard-earned money. But, with the way in which the industry currently operates, investors are wasting hundreds of thousands of dollars on people who most likely cannot consistently outperform an index fund. So why do so many people continue to use financial planners, investment advisors, or other money managers? We believe it’s largely due to either misinformation or the falsehood that these professionals can beat a simple S&P 500 index fund.
Ignoring the daily chatter is also pertinent to investing with success. Buffett stays far away from Wall Street because he doesn’t believe the talking heads will give him an advantage. Indeed, he views it as an impediment to his success, or to anyone looking to make money in the markets for that matter.