Let’s take a break from markets and economics today. Let’s talk investing.
Because we all want to get better at it, right?
Of course we do. But nearly everyone goes about it the wrong way. People think ‘the market’ is there to provide for them…that it’s the source of easy riches, if only they knew ‘the secret’ of how to access them.
Well, here’s some bad news…there is no secret. Or, if there is a secret, it’s not a particularly pleasant one. As with any profession, you have to work very hard at it to become skilled.
But it’s not just about hard work. There are so many other things that come into play. If you hang around long enough, you’ll come to realise that, in addition to taking your money if you’re lazy, the market teaches you other valuable life skills.
For example, a sizable ego is a millstone around your neck when it comes to trying to beat the market. That’s because ego clouds your judgement. It brings emotions into play. And if you let emotions get the better of you, the market will destroy you.
I’m not just talking about the average investor here. I’m talking about EVERY investor. And I’m especially referring to high profile investors here, like hedge fund managers.
One of the eternal ironies of the market is that it attracts people with rather large egos. The fortunes of these people can go either way. They either realise that the market is bigger than them, and they wise up, or they plough on, and the market slowly but surely pulls them apart, financially and emotionally.
Take Bill Ackman, the head of global hedge fund Pershing Square. In 2014, Ackman’s fund was the best performing hedge fund in the world. He was a true hedge fund ‘titan’. But, since then, he’s lost half the funds’ capital and is in all sorts of trouble.
There are a few problems with Ackman’s approach. Keep these in mind and you might save yourself some dollars.
Firstly, he makes very concentrated bets. According to a Financial Times article he holds only around 12 companies in the portfolio at any one time.
That’s not necessarily a bad thing…if only he would shut up about it. But Ackman is ‘high profile’. He likes to broadcast his investments, presumably because, if they turn out to be winners, it will look good for him.
This is where ego comes into it. When you promote your portfolio holdings, there is just too much subjectivity involved. You end up holding because you don’t want everyone to think you’re wrong. You don’t want to admit you’re wrong.
Here’s a tip for you…a ‘secret’ even; stay objective. Don’t have any emotional attachment to a stock whatsoever. Don’t tell anyone you own it. It will make it so much easier to get out when you need to.
Ackman’s Pershing Square fund lost 20% in 2015. It’s down another 25% or so in 2016. That’s largely thanks to a big bet on a pharmaceutical company called Valeant, a company he took a rather large position in last year.
The investment has been nothing short of a debacle. Have a look at the chart below:
The stock price has gone from over $260 per share in August 2015, to around $27 now. Making matters worse, Ackman bought more as the share price declined in the latter part of 2015.
Here’s another secret, dear reader. NEVER DOUBLE DOWN. You can learn this the hard way (like me) and lose money by doing so. Or you can do it the easy way by listening to this advice. Generally speaking, most people learn the hard way.
I’m sure Bill Ackman is a very intelligent person. But he hasn’t got control of his ego. If he did, he would have seen Valeant’s share price break support around $195 in October 2015, stopped touting the stock, and got out immediately.
It’s not easy to get out of a stock when you’re a big hedge fund making concentrated bets. Still, he probably could have got out around $150 per share, licked his wounds and moved on. Now, he’s still hedge fund spokesman for the stock and it’s killing him and his investors.
That’s what the market does to you…whether you’re a small-time player or a hedge fund hot shot. If you think you know better than the market, it will slowly but surely grind you down.
Here’s another ego destroying anecdote related by the Financial Times:
‘Julian Robertson, a former US Navy officer, was one of the most successful hedge fund managers of the 1990s, with his Tiger Management growing to manage $22bn by the end of the decade. But one large bet on an airline helped close down what was then the world’s second largest hedge fund.
‘As the dotcom bubble inflated, Mr Robertson, a famed stock picker, eschewed racy technology stocks and instead built up a huge position in US Airways, a deeply unfashionable and struggling American airline.
‘The stock fell sharply and Mr Robertson’s performance deteriorated enough for him to decide to close Tiger down in early 2000. At the time, the investor said he would hang on to his US Airways shares in spite of the closure as he still believed it to be undervalued. The airline eventually filed for bankruptcy protection in 2002, all but wiping out shareholders.’
No matter what you believe, the market is always right. If you think you know better than the market, and you ignore the lessons it is trying to teach you, it will break you. It doesn’t matter whether you’re a minnow or a whale.
So how do you deal with this?
If your aim is to be a genuine DIY investor, then get rid of your ego. When you lose money (and you will), consider it the cost of an education and make sure you learn the lesson. Don’t blame anyone else but yourself. Because there is no one else to blame.
If you’re not up for the mental challenge of playing the market, then find a guide…someone who you think is on the right track. Look for the counter-intuitive; a fund manager who doesn’t like the spotlight, someone who says they don’t know…someone who says they got it wrong, or talks about a loss instead of a win. (You learn so much more from losses.)
These are all signs of strength. The opposite are all signs of weakness.
The market is a reflection of life. It rewards hard work, and punishes hubris. Keep this in mind and you are in with a fighting chance.
For The Daily Reckoning