MOST of the valuable lessons we learn in life are usually brought down to a simple sentence. Years later, when we start to cross a street, we instinctively remember that admonition from our childhood to “Look both ways.”
But we often ignore these and find ourselves remembering that we should have listened to them.
Investing and money are no different, as there are hundreds of wise sayings to avoid failure and gain success. There is an old Turkish proverb, “He who borrows gets sorrows.” Obviously the Greeks were not interested in any wisdom from the Turks since they have been at war for several millenniums.
One-sentence-wisdom may be particularly true for the stock market. “Buy the rumor and sell the news” is definitely a favorite phrase usually uttered by someone who missed a big price move before the news became public. However, nowhere in that wise old saying is any clue as to when it is a rumor about some genuine news that is forthcoming or part of a “pump and dump” scheme that can cost you money. In fact, the “pump-and-dumpers” rely on people accepting that saying as a truth to further their plans.
One common piece of investing advice is “Don’t put all your eggs in one basket; diversify your portfolio.” The idea here is to reduce the negative impact on your total portfolio if something goes wrong with one of your stock picks.
But someone else will successfully follow “Put all your eggs in one basket and watch the basket very closely.” Here the investor is encouraged to do the proper homework before buying and to have a careful and complete plan if something does goes wrong.
How is the average investor going to reconcile those two contradicting ideas? You might say that it all depends on the current conditions and you would be absolutely right. And therein lies the problem. If strategy depends on current conditions, then, at any given time, all of the wise old sayings can be both correct and wrong.
“The Art of War” or literally “Master Sun’s Rules for Army” is traditionally ascribed to the ancient Chinese general and philosopher Sun Tzu. He addressed that contradiction by writing, “Strategy without tactics is the slowest route to victory. Tactics without strategy is the noise before defeat.” In other words, diversification (a strategy) may make great sense in a stock market that is basically one directional to the upside. But watching one basket carefully and employing specific tactics may make more sense in a somewhat unpredictable market like we have had since the third quarter of 2013.
The best approach might be a simple combination of both ideas. Buy several issues and watch them all carefully, dropping the ones that are not performing. I know that seems like a no-brainer but too many hold the losers along with the winners in the name of diversification. Then the market turns south and the winners cannot offset the losers.
Sun Tzu had some other good ideas about stock-market investing. “He will win who knows when to fight and when not to fight.” Too many stock investors follow another wise saying that is only applicable to the Lotto: “You can’t win if you don’t play.” If you are always in the market, you will significantly reduce your gains and increase your losses. Even this idea of “long-term investing” works only in a long-term rising market.
But what about cost-averaging with staged investments? Had you bought the shares of one prominent Philippine bank every six months since the 2009 low, with all the ups and down, your average purchase price would now break even at the current price. Now, that is not true for many stocks where you would have significant profit, but that is what this tactics thing is all about.
“One mark of a great soldier is that he fights on his own terms or fights not at all.” I do not like “hot tips,” having been burned by one early in my career. I had information directly from one of the majority owning families of Nikon Camera. But I will trade off tips after doing my own homework and buy on my terms. “He who knows when he can fight and when he cannot, will be victorious,” Sun Tzu says.
This is my favorite stock-market idea from Sun Tzu that I wish I had the discipline to always follow. “Invincibility lies in the defense; the possibility of victory in the attack.” You must always be first concerned with your “defense” or protecting your capital and remember that ‘victory’ or profits are only a ‘possibility’, not guaranteed.
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E-mail me at mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter
@mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.