The golden rules for happiness, wealth and stress-free living
Half the stockmarket game is about making profits, the other half about avoiding losses. Photo: James Davies
HERE are 10 sharemarket lessons you should already know:
■Let's start with an oldie but a goodie. If you find yourself standing up at your dealing desk punching the air in delight, it means ''Sell!''
■And another one. If anyone ever says ''we have entered a new paradigm in equity investment'', sell.
■There is only one thing a falling share price tells you and it's not ''BUY ME''. I do not know what it is about Australian culture, but if something falls in price, everyone wants to buy it. I cannot tell you the number of times my wife has told me ''It's OK, it was 25 per cent off''. She could have saved 100 per cent. A falling share price means ''SELL'' not ''BUY''. It's technical analysis 101.
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■The market falls three times as fast as it rises. An academic study into behavioural finance once concluded that losses have three times the emotional impact of a gain. It explains a lot. Fear is a faster driver than confidence. It takes a lot longer to become confident than fearful.
■Humans are not natural investors. We need mechanisms outside the ramblings of the brain to protect equity investments. Unemotional triggers because our natural triggers of fear and greed are useless.
■No one ever tells you to sell. Step on to a car lot and expect to be sold a car. Appear in the offices of the finance industry and expect to be told to invest. We are there to get you in, not let you out. So when you want to sell, it will have to be your decision. Expect to meet resistance.
■There are no crystal balls. When it comes to tomorrow, financial theory tells you to look at history and project it forward. It's rubbish. Tomorrow is not a reflection of the past but is in fact a blank canvas. Historic returns are not future expectations, they are statistics.
■If half the game is about making profits, then the other half is almost certainly avoiding losses. It's about not stuffing it up. It's almost more important than getting it right. To control losses you need to watch what happens to your investments after you have bought them and act when proved wrong. It is this latter bit that the buy-and-hold philosophy turns a blind eye to and that's why it doesn't work except in hindsight on select examples. Buy and hold was never alive, its weaknesses were just hidden by a bull market.The guy that came up with the line ''if you never sell, you never take a loss'' is an idiot. Sometimes you wonder if long-term diversified investment isn't really just a concept the finance industry came up with as an excuse for not having to pay attention. I'm sure Babcock & Brown, ABC Learning and Pasminco were all long-term investments once.
■Timing the market. If you want to save yourself 10 years of going nowhere, it is clear that occasionally you are going to have to time the market. But let that not dismay you, timing is half the fun. Making a judgment and taking a risk is why we're here and the finance industry would do well to embrace it rather than hide in the cliche that you can't. If the finance industry is going to survive, if we are ever going to differentiate ourselves from the execution-only alternatives, we have to have a stab at it. At telling people ''when'' as well as ''what''.
■Be good to your kids. Those kids you're going to pack off to primary school on Monday are the first generation of investors who will have no experience of the 2008 crash and are therefore the first generation capable of irrational exuberance once again. We will be selling them all our assets at the top one day. So smile and be nice. It's us and them.
Marcus Padley is a stockbroker with Patersons Securities and the author of sharemarket newsletter Marcus Today. For a free trial go to marcustoday.com.au. His views do not necessarily reflect those of Patersons.
