I didn’t really say everything I said. --Yogi Berra
Taking Mr. Berra’s words as a caution, and throwing primary sources to the breeze for the cheap shelter of the Internet, I’m going to offer some conventional wisdom about the Wall Street Casino as viewed by famous and semi-famous people.
When I think of life lessons, the first place I go is to the Cherokee cowboy philosopher, who always seems to make sense.
Don't gamble. Take all your savings and buy a good stock, and hold it till it goes up, then sell it. If it don't go up, don't buy it. – Will Rogers
Considering that the cowboy spent most of his years as an entertainer, that’s a pretty penetrating analysis of Wall Street and why sensible people should hesitate.
There are two times in a man’s life when he should not speculate--when he can’t afford it and when he can. – Mark Twain
October. This is one of the peculiarly dangerous months to speculate in stocks. The others are July, January, September, April, November, May, March, June, December, August and February. – Mark Twain
The main purpose of the stock market is to make fools of as many men as possible. – Bernard Baruch
Baruch made a fortune on stocks and commodities trading before he took up advising Presidents and got famous. He was known as “The Lone Wolf of Wall Street” because he would not join any of the brokerage firms clamoring for his services. Of course, much has changed since Baruch’s time. The stock market now makes fools of women as well.
Thinking back to why I wrote this series in spite of the best opinions from some of the smartest people I know, I keep returning to the reality all of us face:
If inflation continues to soar, you’re going to have to work like a dog just to live like one. – George Gobel
All right, Lonesome George is not known for stock picking, but he’s put his finger on the situation that drives a lot of us to Wall Street. Staying with one job long enough to earn a fixed retirement income is a thing of the past, but do we really want to make retirement a thing of the past? When inflation is higher than the interest rate on your savings account, the dangers of the Wall Street Casino begin to look like the danger a Plains Indian faced on his first buffalo hunt as a young man. Real danger, but really necessary if you mean to provide for your family.
Don’t fight the Fed. – Martin E. Zweig
Zweig is known for his stock picking. He’s the hedge fund manager who famously bet millions of dollars of other people’s money that the market was about to crash in 1987, and wound up a hero rather than a goat because he was correct. If the Federal Reserve Bank determined to raise interest rates, he was betting, the fundamentals of the businesses represented by the stock market did not matter, because the market was going down.
More recently, and only because the U.S. Congress could not agree on fiscal policy to fight the Great Recession, the Fed has brought interest rates to an effective zero, making it a great time to expand business (if only you had customers) for the same reason it’s futile to save in a normal savings account or a certificate of deposit.
The key to making money in stocks is not to get scared out of them. – Peter Lynch
Everyone has the brainpower to follow the stock market. If you make it through fifth-grade math, you can do it. – Peter Lynch
Never invest in any idea you cannot illustrate with a crayon. – Peter Lynch
Lynch is a legendary stock-picker, best known for his stewardship of the Magellan Fund between 1977 and 1990, averaging 29 percent for his lucky investors. Now partially retired from Fidelity Investments, he spends most of his time giving away the money he spent the front end of his life making. His primary contribution for us home-gamers is the admonishment to invest in what we know. If you are careful to know what you own, you can’t be flimflammed or fast talked into some decision that benefits only the fast talker.
Never invest emergency savings in the stock market. – Suze Orman
Orman was born to immigrants on the South Side of Chicago and attended the University of Illinois at Urbana Champaign, where she studied social work. Upon graduating, she went to Berkeley and became a waitress. She was in her 30s before she dipped her toes into professional stock-picking, but she started investing for herself pretty early. She’s now a personal finance guru with, as of 2008, a net worth of about $10 million.
Always remember that, in the stock market, you have not gained or lost a cent until you sell. It is not always a good time to sell, and therefore it’s dangerous to tie your savings up where you can’t get to them without taking a big loss. Emergencies happen.
While I endorse her view expressed above, Orman’s life trajectory leads me to wonder if she’s a case of “do what I say and not what I did.”
Operations for profit should be based not on optimism but on arithmetic. – Benjamin Graham
If you are shopping for common stocks, choose them the way you would buy groceries, not the way you would buy perfume. – Benjamin Graham
In the short run, the market is a voting machine but in the long run it is a weighing machine. – Benjamin Graham
Graham was the father of value investing and the guru for Warren Buffett, who is everybody else’s guru. His books, Security Analysis (with David Dodd, 1934) and The Intelligent Investor (1949) remain classics, and Warren Buffett calls the latter “the best book about investing ever written.”
The market can remain irrational longer than you can remain solvent. – John Maynard Keynes
Trust an economist, practitioner of “the dismal science,” to remind us that there can be a substantial gap between when the market votes and when the market weighs. It does not help you to have a correct analysis if it’s combined with incorrect timing. This is why value investors typically “buy and hold,” and have to be prepared to believe in themselves while they wait for their bet to pan out.
Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett
If I could turn a newbie loose with a brokerage account with only one piece of advice from those who have whipped the market, I would choose the remark above by the Oracle of Omaha. You cannot beat the market by following the market, and if you are not planning to beat the market you should just put your money in a passively managed index fund and be done with it.
If you cannot picture yourself wading ankle deep in the metaphorical blood of wailing investors to place a buy order, if you can’t be that certain of your own analysis, you really need to stay on the porch, because you are in no shape yet to run in the weeds with the big dogs.
Stock market bubbles don’t grow out of thin air. They have a solid basis in reality, but reality as distorted by a misconception. – George Soros
By the same token, listen to the man who became a billionaire shorting the British pound. When everybody is piling in and sitting on the sidelines looks most foolish, it’s time to look around for the fire exits, because there’s likely about to be a fire. Remember, the only downside to taking profit is that you might have made more profit by waiting a little longer. Which brings us to a saying that is too old for attribution.
This old saying has been adopted by CNBC’s stock guru Jim Cramer. There are few limits on the ways you can get slaughtered in the market by acting the pig, but a couple are holding a profitable position long after the reason it was profitable has gone away or chasing the latest hot thing rather than doing your own research.
Price is what you pay. Value is what you get. – Charlie Munger
If you stay rational yourself, the stupidity of the world helps you. – Charlie Munger
Munger, who succeeded Warren Buffett at the helm of Berkshire Hathaway, was Buffett’s right hand man as the two of them took a broken down textile company to a conglomerate with a market cap of $337 billion. Munger’s advice to those of us in the cheap seats is to be patient. Decide what a stock is worth and don’t pay a cent more. This is useless to momentum investors, who are often chasing companies for multiples of past earnings that are completely insane. Or companies like Amazon (AMZN), which has a lot of business and no profit but is powered forward on Jeff Bezos’s adrenaline like Tesla (TSLA) is on Elon Musk’s vision.
Buy the rumor and sell the news.
This axiom is too hoary for attribution. It’s a fact that a stock will spike in anticipation when some good catalyst is announced. When the catalyst actually comes to pass, the stock will dip as traders take profit. You can ride this wave if you are very careful, but a wipeout can be costly.
An investment is simply a trade that has gone bad. – Jesse Livermore
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. – Jesse Livermore
The Great Bear of Wall Street, as they called Livermore, made fortunes shorting the market in advance of the crashes in both 1907 and 1929. Note his attention to “numerical formations and patterns.”
Technical analysis—predicting stock movements by looking for patterns in charts—is scary to some people, but it is important to short term traders. A chart typically plots share price on the Y axis and date on the X axis. Across the bottom will be candlesticks representing trading volume. When the proper number of people all act the same way, patterns repeat, a process somewhat complicated by the fact that lots of other traders are watching the same charts and know the same patterns.
Some people, contrary to the first Livermore quote above, say you should never let a trade become an investment or vice versa. Livermore himself came around to the position that a trade that does not pan out needs to be sold immediately.
My view is that you can choose to trade in stocks you would not mind owning if the trade did not work. I’m comfortable if I can look at any position in my portfolio and state a good reason for owning it. Forlorn hope is not a good reason.
An online stock transaction is an agreement about price based on a disagreement about value, a disagreement with somebody you must assume is just as smart as you are and has access to the same information you have. What this realization does to you depends on your personality and it’s a determinant of what we call “risk tolerance.”
It’s better to own a portfolio of dividend paying granny stocks than to own no portfolio at all, at least as long as interest rates are so low that money in a savings account slowly melts. A person completely immobilized by fear will either not save or will lose money on savings because of inaction. Granny stocks live at the shallow end of the pool, too shallow to support many sharks.
I’m at the other end of the fight or flight spectrum. The vision of the person on the other end of every trade I make, the person betting against me, spikes my competitive spirit, which in truth probably does not need that much spiking. I came to the market in the first place to compete against the stereotypical business major seeking vindication for the stereotypical liberal arts major.
Somewhere between those reactions is probably where your risk tolerance lives. Find your personal risk tolerance and respect it, and even if you are motivated to jump in with both feet, never forget that Wall Street is a casino, a place that rewards both luck and skill, not always fairly. If I lose sight of this, the best comedians remind me:
The difference between playing the stock market and playing the horses, is that one of the horses must win. – Joey Adams
This country is bigger than Wall Street. If they don’t believe it, show ‘em the map. – Will Rogers