3/19/2009

03-19-09 - How Not To Invest

You can learn a lot about how to invest by doing the opposite of me. Some of my guiding principles that have been hugely detrimental to me are :

"It's just a bubble - I'll stay out" . Sounds reasonable, but is quite silly. Bubbles are great opportunities to make a lot of money. Staying out because "it doesn't make any sense" or "it's rationally wrong" or "its fundamentally overvalued" is just shooting yourself in the foot. I've intentionally stayed out of tech stocks, real estate, gold, etc. because they are illogical bubbles.

"It's too late to play that now" . Over and over I've seen very obvious trends but figured I missed the good early chance to get in, so now I should pass it up. One example is bubbles, it's so obvious when they're happening, and I would think "oh, this is super obvious to everyone now, it's too late". No, it's not. These things take a long time and there's plenty of chance to get in late. There have been tons of obvious plays recently - like investing in China and India a few years ago - where I thought oh it's already obvious to everyone it's too late to get the good value.

"That's too obvious the market must have compensated for that already" . I always assume that the market is doing a good job of compensating for news and obvious trends. Like if some company announces an awesome new product and everyone loves it - the stock should shoot up based on that news and already have all the good news baked into the value, right? Well, no, not really. Things like "Halliburton will do well under Bush/Cheney" is just such an obvious play that I thought it would never work because the market had already compensated. Similarly stuff like shorting Home Depot in the recession.

"I should do what's been proven to work best over time" . In scientific studies of investment strategy, no portfolio strategy beats buy and hold in the long term (or if it does it's by a very small amount that's less than transaction cost). So you're "supposed" to just find broad market funds with minimum expensenses. Listening to that advice has been a huge mistake.

1 comment:

Wouter said...

> So you're "supposed" to just find broad market funds with minimum expensenses. Listening to that advice has been a huge mistake.

So what do you instead then? Assuming I don't care to manage my investments at frequent intervals... I'd rather spend time programming than becoming market savvy.

old rants