What you pay for an investment is the single biggest determinant for how successful that investment will be. When equity prices are high, your returns will be lower. When they are cheap, your returns will be higher.
— Barry Ritholtz
Here is a dirty little secret: Stock-picking is wildly overrated. Sure, it makes for great cocktail party chatter, and what is more fun than delving into a company's new products? But the truth is that individual stocks are riskier than broad indices.
Even when you are right, there are costs and taxes associated with being tactical. When you are wrong, there are opportunity costs.
If your investing approach requires that you become Nostradamus to succeed, then you are destined to fail.
Most of the time, economic data is fairly benign. I don't wish to imply it is meaningless, but it is not a driver of stock markets. Indeed, the correlation between economic noise and how equity markets perform has been wildly overemphasized.
Whenever you hear a discussion about the short-term swings in any given stock's price, your immediate thought should be whether it matters to why you are investing.
In social media, people cannot build big followings organically unless what they are putting out to the world has value.
Hedge funds are not especially liquid. Many are 'gated' - meaning there are only small windows when you can withdraw your money. They typically have a high minimum investment and often require investors keep their money in the fund for at least one year.
The simple reality of life is that everyone is wrong on a regular basis. By confronting these inevitable errors, you allow yourself to make corrections before it is too late.
Whenever I see a forecast written out to two decimal places, I cannot help but wonder if there is a misunderstanding of the limitations of the data, and an illusion of precision.
The good news is that economists are intelligent, engaging and often charming folks. The bad news is their work is often of little use to investors.
Amongst the financial Twitterati, the term 'muppets' has come to describe any client used and abused by some financial predator. I've adopted the term to describe portfolios that have been assembled for purposes other than serving the clients' best interests.
Truth be told, most financial television bores me. Two or more people discussing the latest economic trends or hot stocks is not especially entertaining.
If you have read me for any length of time, you know I am less than enthralled with much of what passes for financial news.
The bottom line is this: Cash, in modest increments, has a role in any portfolio. But unless you are Warren Buffett, you should limit it to 2 or 3 percent.
Much of the traditional thinking about cash is well intentioned but unrealistic. Should you have six months of living expenses in the bank for emergencies? Sure. Do you? Probably not.
Salesmen always need something to sell.
Owning a variety of asset classes means that some part of your portfolio will be doing well when the cyclical turmoil arises. A broadly diversified portfolio includes large capitalization stocks, small cap, emerging markets, fixed income, real estate and commodities.
If you are not making any mistakes, you are being excessively risk-averse. Investing involves risk, and that means you will occasionally be wrong. And although it is okay to be wrong, it is not okay to stay wrong.
In the investment business, you must expect to be wrong.
As investors, we want to believe we are smart, insightful and uniquely talented - even though we often fail to do the heavy lifting, put in the long hours, and make the uncomfortable but necessary decisions to achieve success.
Yearly data put the rest of the noise into perspective. Most of the weekly or monthly random up-and-down movements get smoothed out. Ultimately, this is where long-term investors should be focused.
With Twitter, you can build your own virtual trading floor and research department, populated by the smartest people on earth. Almost any subject or sector has you can think of, you can find a few people with an expertise in that area.
Getting more and more of our news from the social network is having significant repercussions for markets - and your money.
Many hedge fund managers have become billionaires; perhaps this - plus their reputations as the smartest guys in the room - is why they have captured the investing public's imagination.
You have a natural tendency to want an emotionally satisfying tale - and to make investments based on that - despite times when the actual data may be telling you something different.
Markets are frequently ahead of, and often out of sync with, the economy.
'Returnless risk' is not how you prepare for a decent retirement.
Asset managers have different approaches, and I don't wish to suggest there is only one way to run money. There are many ways one can attempt to reduce risk, improve performance, lower drawdowns and reduce volatility.
If I am going to trash others for their dumb predictions, I must at least hold myself to the same sort of accountability.
Shopmas now begins on Thanksgiving Day. Apparently, escaping the families you cannot stand to spend another minute with on Thanksgiving Day to go buy them gifts is how some Americans show their affection for one another. Weird.
When markets are rallying, cash in the portfolio is a drag on performance, returning about zero.
When you buy anything with lots of leverage, it does not require a whole lot to go wrong to lose it all.
We love a tale of heroes and villains and conflicts requiring a neat resolution.
We must recognize our own behavioral errors. To be blunt, you are not likely to become a cognitive Zen master anytime soon. But a little enlightenment could keep you from making some common investing errors.
If you think too-big-to-fail banks are not worthy of investment because of their impossible-to-read balance sheets, well then, don't buy them.
Whenever you try to pick market tops and bottoms, you are making a prediction. Guessing what stock is going to outperform the market is forecasting, as is selling a stock for no apparent reason. Indeed, nearly all capital decisions made by most people are unconscious predictions.
Little white lies are told by humans all the time. Indeed, lying is often how we get through each day in a happy little bubble. We spend time and energy rationalizing our own behaviors, beliefs and decision-making processes.
Good investors must learn to contextualize the daily background noise.
Twitter has become a group conversation of that type that used to take place on trading floors.
Investors tend to discover 'hot' mutual fund managers just after a successful run and just before the inescapable force of mean reversion is about to kick in.
Despite all the media coverage, glitz and glam of hedge funds, they have not done well for their investors. They have high - some say excessively high - fees; their short- and long-term performance has been poor.
It is in your DNA to love a good story. You know, neat tales with heroes and villains and conflicts to resolve. A good story pushes our buttons, is exciting and memorable.
Narrative drives most of economics. Everything seems to be part of a story, and how that story is told often leads to critical error.
The beauty of diversification is it's about as close as you can get to a free lunch in investing.
You want less of the annoying nonsense that interferes with your portfolios and more of the significant data that allow you to become a less distracted, more purposeful investor.
One thing I detest most about the financial press is the lack of accountability. All sorts of nonsense is said without penalty.
Footage of people camped out at Best Buy or elsewhere is not remotely a celebration. Rather, it's a reminder of just how economically distressed a large percentage of our populace is.
A hedge fund manager whose clients demand monthly performance reports has different needs than any individual investors with a 20-year time horizon. The needs of that long-term investor differ markedly from someone who is retiring in three years.
Any investment bought via credit always runs the risk of margin calls and, eventually, liquidation.
