By Bill Bonner and Lila Rajiva, authors of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics.
If going with the mob is a recipe for financial heartache, what can you do to ensure you don't lose on Wall Street? Well, consider this. In war, politics, and every other form of the public spectacle, action, not inaction, is what normally ruins you. That said, your first step when making investment decisions should always be to do nothing first and then carefully examine the situation.
Here are a few more tips that will help you protect your money from the mob and maybe even make more:
Don't go looking for trouble. We recently received a letter from one our readers. He wanted to know if he should sell an apartment building, which he felt was a good investment, based on his feeling that the bottom is going to fall out of his area's real estate market. He was wondering whether he should stick with a good investment or speculate on the housing market. He was stuck between a rock and a soft place: between the private world he can understand and master and the public spectacle with its frauds, conceits, and wild guesses. We told him we'd stick with what you can understand every time.
Never expect the market to give a sucker an even break. If you think you can buy stock in the public markets at the market price and get a fair deal, you've been misinformed. On Wall Street, the little guys always end up losing in two ways: First, they pay out too much to the financial industry in fees, commissions, and spreads. And second, they lose money because they become patsies of the public spectacle. They read the newspapers. They watch TV. They listen to the experts, the commentators, the pundits. As a consequence, they are buyers to whom the elite contrarians sell. They are the sellers from whom the elite contrarians buy. Without these amateurs, investing wouldn't be nearly as rewarding for the pros . . . or nearly as amusing to the spectator. So, if you're a little guy, watch your back!
Don't be a chump. (And don't listen to chumps, either.) Real speculators look for bets that are not fair and opportunities to play where the field is tilted in their favor. In this sense, public market investors who believe the market will go up next year because it went up last year and because Wall Street analysts said so are not real speculators. They are chumps, and they are the people you want to keep in your sights. If you want to speculate, you need to know what the chumps are doing - and then do the opposite. Or better yet, be a real investor by buying a real investment, something chumps don't buy. What kind of investment is that? A low price is generally an outward sign of inward grace. And one sector that looks cheap now is commodities - especially soft commodities, such as grains and foodstuffs.
Never stray too far from the facts. Imagine that there were no Financial Times, no Barron's, no commentators, and no one writing books, predicting the future performance of the Dow. Investing would become a private matter. And it would be better for it. Why? Because useful intelligence decreases, like gravity, by the square distance from the facts. A private investor is closer to the facts. It's how he knows which way is up. Besides, his brain is better equipped for the scale of private investing. He can get to know the key people personally. And he can see how business operates, up close, where it counts. By really knowing the industry and the business, he is able to eliminate some of the unknowns and make a better decision. Generally, that means he pays less for his investments and works harder to get them.
Never buy tuna unless it's on sale. A man and his wife go shopping and the woman goes into the grocery store. Noticing that cans of tuna fish have been marked down by 50 percent, she decides to take advantage of the low prices and stock up. Her husband, meanwhile, wanders over to his stockbroker, who tells him about some stock that he says is a good investment. The man buys it. A week later, when the two go shopping again, the woman sees the tuna fish selling for twice what she paid the previous time, so instead she buys chicken. The man, on the other hand, goes into his broker's office, finds to his joy that the stock has doubled because "everyone is buying it," and buys twice as much as he bought the week before.
Which of these two people is doing the right thing? The woman, of course. She is buying value based on her own private needs. The man is speculating, but without the real speculator's keen insight into human nature and actual odds. He is not buying a business; in fact, he may not even know what business the company is in. He is buying to be in the market, to be in that great, modern brotherhood of money-savvy alphas. A real investor buys a stock as though it were a can of tuna fish. He knows what it is worth to him and buys it when it is a bargain.
Never buy what someone else really wants to sell. The more someone wants to sell you an investment, the more you don't want to buy it. The owner of an investment usually knows the asset better than the buyer does. No sensible investor downsizes a portfolio on a whim or sells an investment just because he has too many of them. Serious investors hold good investments until they believe they are no longer so good. Any buyer should know that the best investments are those that no one wants to sell. They are the investments that pay no commissions or fees, that have no managers, that give no press conferences, that issue no quarterly reports. They are the ones you have to work hard to find. These are the kind of investments private investors should look for - even if you have to wait years to buy at a good price.
Never buy what everyone else is rushing to buy. In the investment world, a good deal is a good deal only so long as too many people don't try to take advantage of it. That's why initial investors in a new trend often do well. They are able to choose the best opportunities at the most reasonable prices. Those who come along later have progressively less and less choice at progressively higher and higher prices. Logically, as the amount of money flowing into a market increases, prices should rise and the attractiveness of the opportunities should recede. But investors are not merely thinking beings - and often they get caught up in the mania of what everyone else is doing. The investors who succeed, however, are generally those who work hard at it and avoid doing what everyone else is doing. The more serious they are, the more they are out of the market and into specific companies that they know quite well.
Don't do anything. Nothing. Nada. Zilch. In public affairs and investments, doing nothing is usually the best course of action. Warren Buffett is probably the best investor who has ever lived and he holds billions in cash. If he cannot find anything better to do with his money than to leave it in cash - effectively doing nothing with it - how can the average investor expect to do better? Is this the time to buy stocks? Probably not. The idea is to buy low and sell high later. When stocks are high already, there is no alternative; you must do nothing. Is it a good time to buy bonds? Again, probably not. Bonds are expensive, too; yields are low. At today's prices, you are not likely to make money in bonds. It is better to do nothing. Should you buy property? Not unless you're feeling lucky. So, what should you do? Do nothing is our advice.
