There They Go Again

One of the questions asked most often in connection with investing – perhaps second only to “What would be my return?” – is “How much income will I receive?” I have met many investors who require an income from their investment in order to meet living expenses. For perhaps behavioural reasons, many investors are unwilling to finance consumption out of capital. Capital in this instance is the amount originally invested. As a result, many savers are currently looking for high monthly returns in order to earn an income and avoid having to fund living expenses out of their capital. In an effort to generate sufficient returns from investments, they are taking on too much risk unknowingly.

As I read the website posts in 2018 about the new financial products that have high and guaranteed returns as their birth right, I find myself saying one thing over and over again “There they go again”. What are some of the behaviors that I have observed lately?

This time it is different. The most dangerous thing in investing is believing that the rules of the past are old-fashioned and new ways are required to create wealth. It is well documented that when investors take a trend to excess, it does busts eventually. Financial memory is brief, but subjective public attitudes can be more durable.

I will never lose. You never say never and you never say always in the stock market. Many investors are still struggling to stop themselves from a believing the most fairy-tale story of all: an investment without risks. I will say it now: there is no such thing as a risk-free investment.

The stock market is not a zero sum game. A zero-sum is a situation in which one person’s gain is equivalent to another’s loss. A zero-sum game may have as few as two players, or millions of participants. Therefore, for every rand that you win in a stock market, another investor loses. It is that simple. So it’s highly unlikely for 5 000 strangers in one trading room taking different trading positions to consistently be winners in the stock market, assuming they are playing in the same market. If they follow the same strategy (which rarely happens), then wins and losses will affect them equally.

The storytelling is simple. By this, I mean to make fun of investors’ tendency to believe stories that seem true on the surface but ignore how the stock market works. These include “I’m about to share with you the biggest secrets of making money in the stock market”. In your search to generate high returns, invest in things you understand with a certain level of confidence.

Past returns will look like future returns. There is no asset class that will do well simply because it exists. An example is property. People say, “You should buy property, it always goes up in value”. However, nobody tells you that bought at the wrong price and time property investing does not work. The key is who likes the investment now and who does not, future prices will be determined by whether more people demand the asset or not.

It sounds too good to be true, but I don’t want to miss out. There’s been many times when people knew something was unlikely to work forever but jumped on the bandwagon anyway. Usually they do this because they think there is a bit more left and watching from the sidelines while everyone gets rich becomes too painful a pill to swallow.

I will get out before it stops working. In the stock market there is no referee that blows the whistle to prepare you for oncoming danger. Nobody ever asks how he or she will know when to sell before others know, or whom will they sell to if everyone is also trying to get out at the same time.

We have secrets that are used by professionals. There are no secrets in the stock market! The widely known winning formula is to buy low and sell high. If you rely only on strictly ordered formulas you miss what is important. That is because those ‘secrets’ assume a certain baseline knowledge, just as a GPS will not tell you to stop at a red traffic light.