The Market Doesn't Beat You, You Beat You

“All through time, people have basically acted and reacted the same way in the market as a result of: greed, fear, ignorance and hope. That is why the numerical formations and patterns recur on a constant basis.” Attributed to Jesse Livermore

Recently I had a debate with an investor who insisted we were not trading enough and that we need to “do something”. When I asked what they felt I should do, the flippant response was, “you’re the advisor, you tell me”…

Conversations like this are few as the vast majority of clients have learned patience and have come to trust the advice given them. However there will be from time to time someone who feels the urge to “do something”, without being able to articulate what exactly that something should be.

I don’t blame this investor’s outlook. The idea of doing something is inherent in all of us, that by moving you are doing something productive and not moving means your being lazy, stupid or both. I’m reminded of Warren Buffett; “[one of our investment styles can best be described as] lethargy bordering on sloth.”

The bias to move (or trade in this case) is ingrained in investors. Just watch the talking heads on BNN, MSNBC or Bloomberg discuss their investment flavour of the month or their latest trading scheme that’s going to “beat the index” for proof. Jim Cramer is the poster child for this kind of investing but look at his rate of return compared to the S&P500.

Source: Market Watch

Jeff Saut, the Raymond James’ chief investment strategist recently wrote about Jesse Livermore, the legendary Wall Street investor. It is important to point out that Livermore lost most of his fortune, by his own admission to not sticking to his own rules. Jeff summarized Livermore’s rules in his February 27, 2017 Investment Strategy publication:

1. There is nothing new in Wall Street. There can’t be because speculation is as old as the hills. Whatever happens in the stock market today has happened before and will happen again.
2. The desire for constant action irrespective of underlying conditions is responsible for many losses in Wall Street even among professionals.
3. I never lose my temper over the stock market. I never argue the tape. Getting sore at the market doesn’t get you anywhere.
4. They say you can never go poor taking profits. No, you don’t. But neither do you grow rich taking a four-point profit in a bull market. Where I should have made twenty thousand I made two thousand. That was what my conservatism did for me.
5. Remember that stocks are never too high for you to begin buying or too low to begin selling.
6. A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street… nevertheless lose money. The market doesn’t beat them. They beat themselves, because though they have brains, they cannot sit tight.
7. After spending many years in Wall Street and after making and losing millions of dollars I want to tell you this: It never was my thinking that made the big money for me. It always was the sitting. Got that? My sitting tight!
8. Losing money is the least of my troubles. A loss never bothers me after I take it… But being wrong – not taking the loss – that is what does the damage to the pocketbook and the soul.
9. Prices, like everything else, move along the line of least resistance. They will do whatever comes easiest.
10. The speculator’s chief enemies are always born from within. It is inseparable from human nature to hope and to fear. In speculation when the market goes against you hope that every day will be the last day – and you lose more than you should had you not listened to hope – that same ally that is so potent a success-bringer to empire builders and pioneers, big and little. And when the market goes your way you become fearful that the next day will take away your profit, and you get out – too soon. Fear keeps you from making as much money as you ought to. The successful trader has to fight these two deep-seated instincts… Instead of hoping he must fear; instead of fearing he must hope.

Like Jeff, I would focus on rules 2 and 7, calling back to Warren Buffett’s aforementioned strategy of “sloth” investing. Bias can be an investor’s worst enemy, which is why I am always trying to evaluate my own biases. By understanding one’s own biases, you can begin to advise other’s on theirs and try and steer them in directions that is in their best interest. The aforementioned investor whom which I had my debate with needed to be reminded of why they pay me and it is not simply for the ability to trade; anyone can get that online for pennies on the dollar. Part of good advice is the ability to recognize bias and work to counter it when it is damaging to an investors bottom line, and that will sometimes mean not doing anything.

Sources: Jeff Saut, Wikipedia, Market Watch,