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20 truths about the stock market

(An article from Equity Aug 2013 by Marcus Padley)

Twenty Truths about the stock market:

  1. 50% of making money from the stock market is not picking the best stocks its avoiding the bad stocks. So why does everyone spend 100% of the time finding the good stocks?
  2. Pick all the weeds and you are left with the flowers. Pick all the flowers and you get left with the weeds. Pick the weeds. A small weed is the best weed.
  3. If you want to achieve the same returns as the stock market you also have to trade out of the losers and replenish with winners. Of course the index will do that in a virtual world without fees. In other words, index returns are a bit of a fantasy and accumulation indices that compound dividends are even more fantastic. No wonder your fund manager underperforms. The index doesn’t have to pay for an office.
  4. Bear markets start and Bull market end when the market says so but it will only become obvious in hindsight and too late and by then it will be so obvious you will look stupid for being late.
  5. If you have a mortgage, every dollar you lose goes on your debt and you pay interest on it, possibly for 20 years. On that basis, with interest rates at 5% for the next 20 years (generous assumption) every dollar you lose actually costs you $2.50.
  6. Don’t buy a portfolio, buy stocks, and one day your portfolio will miraculously reappear.
  7. You will make more money guessing what everyone doesn’t know about a stock than you will ever make finding out what everyone knows about a stock. The unexpected moves share prices, not the consensus so concentrate on the unexpected. That’s where the money is.
  8. A diversified portfolio of 20 stocks you ignore is more risky that a portfolio with one stock you know everything about.
  9. You cannot do it the Warren Buffett Way or there would be a fund manager doing it, we would all be invested and we’d all be billionaires. Quite simply Buffett is free marketing for financial products, it is not reality.
  10. The market falls three times as fast as it rises because, as an academic behavioural finance paper once concluded, losses have three times the emotional impact of a gain. Fear is a bigger driver than confidence and “It takes five minutes to be fearful, but you can’t get confident in five minutes”. Stock markets rise slowly and fall quickly. You have to react quickly to losses. In a bull market you have time. In a bear market you don’t.
  11. If you ever find yourself standing up and punching the air in delight, it means “Sell”.
  12. There is only one thing a falling share price tells you and its not “BUY ME”.
  13. In a Bull Market the core virtue is “Participation”. In a Bear Market the core virtue is “Non Participation”.
  14. In a Bull market you are a sophisticated investors. In a bear market all professional financial advisers are idiots.
  15. Bear markets end when the headlines are terrible. Bull markets end when the headlines are euphoric.
  16. Murphy’s law of the stock market: The average loss is inexplicably bigger than the average profit.
  17. Murphy’s law of stock broking: Errors always go precipitously against you.
  18. The only effortless way to get rich is be born rich. The problem with that is that you only get one shot at it and people seemingly far less capable than yourself always seem to succeed at it.
  19. Be nice to your children and grand children. They will be the first generation of future investors that have no recollection of the 2008 financial crisis and the next generation capable of a bout of irrational exuberance. It will be these delicate little cherubs that eventually pay top dollar for your assets. Nurture them.
  20. The best advice no one ever gave me: If faced with two equally attractive potential mating partners for life, marry the rich one.

Marcus Padley is the editor of Marcus Today, a daily stock market newsletter.

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