Wall Street has a lot of colorful sayings. Some of the sayings actually contain useful information for investors. I often refer to some of my favorite Wall Street sayings during my presentations. Interestingly enough, I often have people come up to me and tell me they remember and use the sayings in managing their investment accounts.
As an attorney as well as an investment adviser, my favorite Wall Street saying is “don’t confuse brains with a bull market.” If more investors took heed of this warning, I believe that there would be far less unnecessary losses in investors’ accounts. Studies have consistently shown that approximately 75% of stocks follow the overall trend of the stock market. “A rising tide lifts all boats ” and “the trend is your friend” are two further acknowledgements of the studies’ findings.
Quite simply, it’s hard not to make money in a bull market. As Sir John Templeton said, “financial genius is a rising stock market.” The key for investors is to acknowledge the impact of the primary trend in the stock and not be lulled into a false of security during bull markets.
Along those same lines, Warren Buffett took the “rising tide” principle one step further, adding that “it’s only when the tide goes out that you learn who’s been swimming naked.” “Swimming naked” in this regard refers to investors who fail to implement risk management strategies into their investment portfolios. While many investors focus only on return, investment legends like Ben Graham, Harry Markowitz, William Sharpe and Charles Ellis have suggested that risk management is actually the secret to investment success. As another Wall Street saying goes, “don’t tell me how much you made, tell me how much you were able to keep.” There are any number of risk management strategies that investors can use to manage their investment risk, including hedging through the use option strategies and inverse index investments.
“Bulls make money, bears make money, pigs get slaughtered” is just an acknowledgement of the cyclical nature of the market. A buy and hold approach to investing simply ignores the cyclical nature of the stock market and ensures that “pigs” will suffer unnecessary losses during bear markets and then have to spend time catching up in the subsequent bull market.
Advocates of a buy and hold approach point to issues such as market timing and the “best days” to support market timing. We’ve addressed these issues in earlier posts and articles. There is nothing in the works of Ben Graham and Nobel laureates such as Dr. Markowitz and Dr. Sharpe that suggest the superiority of a buy and hold approach to investing. In fact, each of these men, as well as numerous other leaders in the field of investment management, have stated that it is important that investors make changes in their portfolios as conditions in the economy and the market change.
As our tag line suggests, informed, proactive investors have the power to better protect their financial security. All I know is that I’ll rely more on Nobel laureates and investment legends and act to preserve my financial security. After all, “no one ever went broke taking profits.”