he history of capitalism, this is the hardest time ever to invest. People are going broke, losing their jobs, and fear more than greed rules the news and tries to rule thoughts.
In short: people are scared. And I do think the uncertainty is going to rise quickly so I wanted to put this note together.
In 2001 and 2002 I lost all my money through bad investing. The same thing happened to me on a couple of occasions after that.
So why should anyone listen to me about investing? You shouldn’t. You shouldn’t listen to anyone at all about investing. This is your hard-earned money. Don’t blow it by listening to an idiot like me.
The most important three words in investing is: “I don’t know”. If someone doesn’t say that to you then they are lying.
I was preparing this morning for my podcast conversation I am having tomorrow with Stephen Dubner, co-author of Freakonomics and the upcoming “Think Like a Freak”. One of the statistics he points out is that CXO Advisory Group polled the predictions of 500 investment strategists and pundits. The “experts” had a 47% success rate. Good luck if you listen to any of them.
Here’s my experience (and perhaps I’ve learned the hard way about what NOT to do and a little bit about what TO do.):
I’ve run a hedge fund that was successful. I ran a fund of hedge funds, which means I’ve probably analyzed the track records and strategies of about 1000 different hedge funds.
I’ve learned ONE MAJOR THING, which I will repeat below: ALL OF WALL STREET IS A SCAM. There are zero exceptions.
I’ve been a venture capitalist and a successful angel investor (I was a HORRIBLE venture capitalist though – but I put that under the category of “does not work well with others”).
I can’t raise money anymore. Nor do I want to play that game. I don’t BS about my losses and everyone else does.
So I’m not in that business anymore. It’s too much work to run a fund anyway.
In the past 15 years I’ve tried every investing strategy out there. I honestly can’t think of a strategy I haven’t experimented with.
I’ve also wrote software to trade the markets automatically and I did very well with that but that industry is now dominated by the high frequency guys.
And I’ve written several books on my experiences investing, with topics ranging from automatic investing to Warren Buffett, to hedge funds, to long-term investing (my worse-selling book, “The Forever Portfolio”, which has sold 399 copies since it came out in December 2008, including one copy for the entire last quarter).
Incidentally, why publish a book called “The Forever Portfolio” during the worst financial crisis in history. I begged my publisher (Penguin) to postpone but they couldn’t. “It’s in the schedule” was their magic incantation. Publishers largely suck. The good news is: they will never make back the advance.
That said, all of the picks in that book have done excellently since then (Claudia proved this in a review of the book on Amazon but then was shamed into admitting she was my wife, which she did not at first disclose) but the one thing I am proud of is that I made a crossword puzzle for the book. I don’t know of any other investing book with a crossword puzzle in it.
So, Ok! Let’s get started. Don’t follow any of my advice. This is advice that I do and follow and it works for me.
A) Should I Daytrade?
Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.
Then you will get sick, and eat all of your money, but it will taste thrilling along the way. Which is what daytrading is.
B) I Don't Believe You. Many People Daytrade For A Living.
No. I personally know of two. Maybe three. And they work 24 hours a day at it and have been doing it for a decade or more. So unless you want to put in that amount of time and be willing to lose a lot first then you shouldn’t do it.
One more thing: when you daytrade and lose money it’s not like a job.
When you go into a job you NEVER lose money. If you show up for two weeks, you get paid. Even if you have been warned repeatedly about sexual harassment you still get paid. You might get fired but they won’t take your money.
The stock market TAKES your money on bad days.
Sometimes it takes a lot of your money. We’re not used to the brutality of that and it can destroy a person psychologically, which makes one (me) trade even worse.
C) Well, Who Makes Money In The Market Then?
Three types of people:
Without describing them, here’s the history: Reg S, Calendar trading, Mutual fund timing, Death spirals, Front running, Pump and Dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist. Those are scams from just the past 15 years. If I went back 50 years the list would be fifty times as big.
ONE TIME I WANTED TO RAISE MONEY for one of my funds. I went to visit my neighbor’s boss. The boss had been returning a solid 12% per year for 20 years.
EVERYONE wanted to know how he did it. “Get some info while you are there,” a friend of mine in the business said when he heard I was visiting my neighbor’s boss.
The boss said to me, “I’m sorry, James. We like you and if you want to work here, then that would be great. But we have no idea what you would be doing with the money. And here at Bernard Madoff Securities, reputation is everything”.
So I didn’t raise money from Bernie Madoff although he wanted me to work there. Seemed like a very nice guy.
I was depressed when I left his offices in the so-called “lipstick building”. Why will I never be good enough? I thought.
Later, the same friend who wanted me to get “info” and “figure out how he does it” said to me: “we knew all along he was a crook.”
Which is another thing common in Wall Street. Everybody knows everything in retrospect and nobody ever admits they were wrong.
Show me a Wall Street pundit who says “I was wrong” and I’ll show you…I don’t know…something graphic and horrible and impossible [fill in blank].
Remember the magic words.
“I”. “Don’t”. “Know”.
D) So how can one make money in the market?
I told you about: #1. Pick some stocks and hold them forever. Since “I don’t know” applies, it’s almost impossible to pick the right ones.
E) What stocks should I hold?
Warren Buffett has some advice on this (and I know because I wrote THE book about him. A friend of mine who knows him told me my book was the only book that Buffett thought was accurate about him).
So since I don’t know anything, I will let Warren Buffett take over here.
He says, “if you think a company will be around 20 years from now then it is probably a good buy right now.”
I would add to that, based on what Warren does. It seems to me he has five criteria:
Note that Buffett is not what some people call a “Value investor”. But I won’t get into that discussion here.
F) What Else?
One time I accidentally got an email that was intended for a famous well-known investor. It was from his broker and contained his portfolio. I can’t say how this accident happened but it did.
Of course, I opened the email.
This is a man who writes about lots of stocks.
His entire portfolio was in municipal bonds.
I don’t know whether or not municipal bonds are good investments. But I would look into stocks that are called “closed-end funds” that invest only in municipal bonds.
They usually pay good dividends, usually trade for less than their cash or assets in the bank, and are fairly stable (it’s very hard for a municipality to not pay back its debts for various reasons, some of them constitutional).
But do a lot of research into the towns.
I’ll tell you one story. I had an idea for a fund in 2008 when oil was crashing at the end of the year.
Stocks / funds that invested in municipal bonds in Texas were getting destroyed. Somehow, because oil was going down, everyone naturally assumed that Texas was going to simply disappear. I assumed that most people were wrong about Texas.
I researched every municipal bond out there and found a good set of Texan cities that were being sold off with everyone else even though they had nothing to do with oil.
(Photo by Shai Barzilay)
In short: people are scared. And I do think the uncertainty is going to rise quickly so I wanted to put this note together.
In 2001 and 2002 I lost all my money through bad investing. The same thing happened to me on a couple of occasions after that.
So why should anyone listen to me about investing? You shouldn’t. You shouldn’t listen to anyone at all about investing. This is your hard-earned money. Don’t blow it by listening to an idiot like me.
The most important three words in investing is: “I don’t know”. If someone doesn’t say that to you then they are lying.
I was preparing this morning for my podcast conversation I am having tomorrow with Stephen Dubner, co-author of Freakonomics and the upcoming “Think Like a Freak”. One of the statistics he points out is that CXO Advisory Group polled the predictions of 500 investment strategists and pundits. The “experts” had a 47% success rate. Good luck if you listen to any of them.
Here’s my experience (and perhaps I’ve learned the hard way about what NOT to do and a little bit about what TO do.):
I’ve run a hedge fund that was successful. I ran a fund of hedge funds, which means I’ve probably analyzed the track records and strategies of about 1000 different hedge funds.
I’ve learned ONE MAJOR THING, which I will repeat below: ALL OF WALL STREET IS A SCAM. There are zero exceptions.
I’ve been a venture capitalist and a successful angel investor (I was a HORRIBLE venture capitalist though – but I put that under the category of “does not work well with others”).
I can’t raise money anymore. Nor do I want to play that game. I don’t BS about my losses and everyone else does.
So I’m not in that business anymore. It’s too much work to run a fund anyway.
In the past 15 years I’ve tried every investing strategy out there. I honestly can’t think of a strategy I haven’t experimented with.
I’ve also wrote software to trade the markets automatically and I did very well with that but that industry is now dominated by the high frequency guys.
And I’ve written several books on my experiences investing, with topics ranging from automatic investing to Warren Buffett, to hedge funds, to long-term investing (my worse-selling book, “The Forever Portfolio”, which has sold 399 copies since it came out in December 2008, including one copy for the entire last quarter).
Incidentally, why publish a book called “The Forever Portfolio” during the worst financial crisis in history. I begged my publisher (Penguin) to postpone but they couldn’t. “It’s in the schedule” was their magic incantation. Publishers largely suck. The good news is: they will never make back the advance.
That said, all of the picks in that book have done excellently since then (Claudia proved this in a review of the book on Amazon but then was shamed into admitting she was my wife, which she did not at first disclose) but the one thing I am proud of is that I made a crossword puzzle for the book. I don’t know of any other investing book with a crossword puzzle in it.
So, Ok! Let’s get started. Don’t follow any of my advice. This is advice that I do and follow and it works for me.
A) Should I Daytrade?
Only if you are also willing to take all of your money, rip it into tiny pieces, make cupcakes with one piece of money inside each cupcake and then eat all of the cupcakes.
Then you will get sick, and eat all of your money, but it will taste thrilling along the way. Which is what daytrading is.
B) I Don't Believe You. Many People Daytrade For A Living.
No. I personally know of two. Maybe three. And they work 24 hours a day at it and have been doing it for a decade or more. So unless you want to put in that amount of time and be willing to lose a lot first then you shouldn’t do it.
One more thing: when you daytrade and lose money it’s not like a job.
When you go into a job you NEVER lose money. If you show up for two weeks, you get paid. Even if you have been warned repeatedly about sexual harassment you still get paid. You might get fired but they won’t take your money.
The stock market TAKES your money on bad days.
Sometimes it takes a lot of your money. We’re not used to the brutality of that and it can destroy a person psychologically, which makes one (me) trade even worse.
C) Well, Who Makes Money In The Market Then?
Three types of people:
- People who hold stocks FOREVER. Think: Warren Buffett (has never sold a share of Berkshire Hathaway since 1967) or Bill Gates (he sells shares but for 20 years basically held onto his MSFT stock).
- People who hold stocks for a millionth of a second (see Michael Lewis’s book “Flash Boys” which I highly recommend.) This is borderline illegal and I don’t recommend it.
- People who cheat.
Without describing them, here’s the history: Reg S, Calendar trading, Mutual fund timing, Death spirals, Front running, Pump and Dump, manipulating illiquid stocks, Ponzi schemes, and inside information. Inside information has always existed and always will exist. Those are scams from just the past 15 years. If I went back 50 years the list would be fifty times as big.
ONE TIME I WANTED TO RAISE MONEY for one of my funds. I went to visit my neighbor’s boss. The boss had been returning a solid 12% per year for 20 years.
EVERYONE wanted to know how he did it. “Get some info while you are there,” a friend of mine in the business said when he heard I was visiting my neighbor’s boss.
The boss said to me, “I’m sorry, James. We like you and if you want to work here, then that would be great. But we have no idea what you would be doing with the money. And here at Bernard Madoff Securities, reputation is everything”.
So I didn’t raise money from Bernie Madoff although he wanted me to work there. Seemed like a very nice guy.
I was depressed when I left his offices in the so-called “lipstick building”. Why will I never be good enough? I thought.
Later, the same friend who wanted me to get “info” and “figure out how he does it” said to me: “we knew all along he was a crook.”
Which is another thing common in Wall Street. Everybody knows everything in retrospect and nobody ever admits they were wrong.
Show me a Wall Street pundit who says “I was wrong” and I’ll show you…I don’t know…something graphic and horrible and impossible [fill in blank].
Remember the magic words.
“I”. “Don’t”. “Know”.
D) So how can one make money in the market?
I told you about: #1. Pick some stocks and hold them forever. Since “I don’t know” applies, it’s almost impossible to pick the right ones.
E) What stocks should I hold?
Warren Buffett has some advice on this (and I know because I wrote THE book about him. A friend of mine who knows him told me my book was the only book that Buffett thought was accurate about him).
So since I don’t know anything, I will let Warren Buffett take over here.
He says, “if you think a company will be around 20 years from now then it is probably a good buy right now.”
I would add to that, based on what Warren does. It seems to me he has five criteria:
- A company will be around 20 years from now.
- At some point, company’s management has demonstrated in some way that they are honest, good people. If you can get to know management even better.
- The company’s stock has crashed for some reason (think American Express in early 60s, which he loaded up on. Or Washington Post in the early 70s. Or Coca-Cola in the early 80s).
- The company’s name is a strong brand: American Express, Coke, Disney, etc.
- Demographics play a strong role.
Note that Buffett is not what some people call a “Value investor”. But I won’t get into that discussion here.
F) What Else?
One time I accidentally got an email that was intended for a famous well-known investor. It was from his broker and contained his portfolio. I can’t say how this accident happened but it did.
Of course, I opened the email.
This is a man who writes about lots of stocks.
His entire portfolio was in municipal bonds.
I don’t know whether or not municipal bonds are good investments. But I would look into stocks that are called “closed-end funds” that invest only in municipal bonds.
They usually pay good dividends, usually trade for less than their cash or assets in the bank, and are fairly stable (it’s very hard for a municipality to not pay back its debts for various reasons, some of them constitutional).
But do a lot of research into the towns.
I’ll tell you one story. I had an idea for a fund in 2008 when oil was crashing at the end of the year.
Stocks / funds that invested in municipal bonds in Texas were getting destroyed. Somehow, because oil was going down, everyone naturally assumed that Texas was going to simply disappear. I assumed that most people were wrong about Texas.
I researched every municipal bond out there and found a good set of Texan cities that were being sold off with everyone else even though they had nothing to do with oil.
(Photo by Shai Barzilay)
