Investing Aphorisms

Morgan Housel of the Motley Fool has a list of 122 Things Everyone Should Know About Investing And The Economy. Many are variations on a theme but here are a few I liked:

  • Investors want to believe in someone. Forecasters want to earn a living. One of those groups is going to be disappointed. I think you know which.
  • There were 272 automobile companies in 1909. Through consolidation and failure, three emerged on top, two of which went bankrupt. Spotting a promising trend and a winning investment are two different things.
  • I once asked Daniel Kahneman about a key to making better decisions. “You should talk to people who disagree with you and you should talk to people who are not in the same emotional situation you are,” he said. Try this before making your next investment decision.
  • For many, a house is a large liability masquerading as a safe asset.
  • “Success is a lousy teacher,” Bill Gates once said. “It seduces smart people into thinking they can’t lose.”

Comments

Not sure about the home as a liability. The US tax code more or less compels a middle-income or above taxpayer to buy real estate, especially as housing.

No, it's still a liability. The tax savings are usually eaten up by maintenance costs. Also, it's illiquid. You can sell off a portion of your stock portfolio if you need cash in a hurry. You can't sell off one of your bedrooms.

Yes! Houses are weird assets. See also http://updatedpriors.blogspot.com/2014/04/own-or-rent-thinking-aloud-about-housing.html

A house that you live in is not an alternative to stocks. You must live somewhere. You either rent or buy. If you need cash in a hurry, you can't choose to not pay the rent. At least if you buy you can take out a home equity loan.

You have to live somewhere. Are we saying that landlords are unable to pass maintenance costs onto their tenants?

To be honest the maintenance costs of a house are serious but not necessarily a breaking point provided one does not confuse maintenance with lifestyle. A 'new kitchen', for example, is rarely about maintenance.

It's not illiquid. Get a HELOC.

You do realize that's more debt, right?

Yes, but your concern was liquidity as a negative of a home being an investment.
This is only good for short term needs, of course.
I'm both a homeowner and landlord, have never flipped a house. Numbers are in the owner's favor, unless you live in one of the absurd cities.
There's no doubt it is a long term proposition though. I would never go in for less than 10 years.

@TMC,

I used to think like you. I didn't wait for the rainy day before getting a HELOC, I got a HELOC in case of a rainy day. Then the financial crisis hit. At that time, I don't believe many HELOCs were being originated, which is why I was glad I already had one.

However I soon found my HELOC to be an absurd situation worthy of Joseph Heller: The bank informed me they were withdrawing from my state and that I would no longer be able to tap my HELOC. There was a catch: if I wished to close it before its five year anniversary I would still be hit with the early-cancellation fee stipulated in the HELOC agreement. Apparently they sought to keep me on their balance sheet as a HELOC in good standing for the regulators, while denying me from using it and therefore cannibalizing part of my credit capacity.

How much more illiquid could it be?

For everybody who says, "You can just take out a HELOC." No, you cannot, especially today. You have to apply for a HELOC and you can be turned down. You don't have to apply to liquidate a portion of a stock portfolio. Also, anon misses my point. The argument is that if you have $20,000, you can either use that as a down payment for a house or you can invest. Rather than skip your rent payment when you need money, you liquidate some of that investment.

I can see the liquidity issue being a problem for some people. Just make sure you have additional savings. And if you're only in for 20% that shouldn't be too hard. Regarding maintenance, bullshit. You either rent or own. You don't get to deduct rent from your federal income taxes. What a lot of people do, though, is buy a much nicer house than they would ever consider renting. That can create problems. It doesn't change the math on the rent vs own calculation though.

But incentives are better aligned if you own. Calling a plumber to fix the faucet only makes sense if you are rich or if you rent.

Housing in areas like the Bay Area, Seattle, Washington DC, Aspen, LA, and New York City have been great investments . depnds where you buy

@ummm - + 1 . We bought real estate in 2006, at the top of the overpriced market in DC in a good location. Took a hit of about 15% in 2008/9, now valued higher than when we bought it. Rich get richer, thanks to Keynesian economists and the people's love of federal government. To them I humbly (not) say: thank you for making me and mine in the top 1%. BTW: 6% of inside the beltway Washingtonians make over 200k USD/yr. Six percent, not 1%.

6% of American Households make $200k+. To be in the top 1%, you need to be over $500k. Here is a calculator to see percentiles:

http://www.whatsmypercent.com/

I think that's for taxpayers. This site finds a mere $210K gets an individual into the top 1% of Americans. I'm guessing this is by the loosest definition, which may include newborns :)

$310K for HH.

http://politicalcalculations.blogspot.com/2013/09/what-is-your-us-income-percentile.html#.VIyVM_l4oxJ

This year, $390k in adjusted gross income per IRS data. AGI excludes 401k, pension contributions, employee benefits not counted toward income, interest on municipal bonds, etc. and comes after deductions for mortgage, personal deductions, etc., so I would guess the $500 k is closer than $300k.

@liberalerts, Tall Dave - thanks, this was good, bookmarked. I also found somewhere a net worth calculator that shows me and mine are comfortably in the 1% in terms of net worth. I believe the cutoff was $6M net worth (assets - liabilities, don't forget those liabilities you luxury car driving imposters, lol). Rich get richer, same as it always was, and the way it should be say some backwards looking economists and they may be right? "Nothing succeeds like success"...Talleyrand. If it isn't broke, don't fix it... anonymous.

Anything to provide for you and your "family", Ray.

A mortgage is also 1) leverage that you can use to invest in other assets and 2) inflation hedge

Your house is an asset. The liability related to your house is the mortgage contract you agreed to in order to buy your house.

The market value of your house may go up or down giving it the characteristic of an investment, but it is also a good that you use, either to provide you with shelter or to rent to another to provide income.

Borrowing to buy a house is like borrowing to buy stocks; the income must exceed the cost in order to be a successful investment. The income is the increase (or decrease)in value of your home plus the rent income paid by a tenant or the savings of living in your own home rather than renting another residence. The cost is the mortgage interest plus the opportunity cost of the equity you have in your home plus other "costs to own" (taxes, maintenance etc.).

A home is not a liquid asset but provides better long term gains than stocks or bonds (on average). I for one, consider my home a good, something to live in and keep my stuff. I will consider the sales proceeds as pure gravy when shuffle off to the care home. Whether the yield from owning a home is 1% or 1000% I don't care. I am safe, dry and warm.

This one kind of blew me away.

79. Twenty-five hedge fund managers took home $21.2 billion in 2013 for delivering an average performance of 9.1%, versus the 32.4% you could have made in an index fund. It's a great business to work in -- not so much to invest in.

The world stock market is about half the size of the world debt market, and there is no indexing in bonds, other than maybe US treasuries at 2.09%. Maybe that is why the stock market is going up; all these bond folks are tired of no yield and are buying into a stock market rise.

Serious question. At what point does index fund investing start driving the market as opposed to following it?

I wouldn't underestimate the number of investors who think they can beat the averages and have enough money that they can take those shots.

Indexing would just drive inefficiency. It's basically a kind of free ride.

But as Jan points out, there are always enough traders that it doesn't matter.

A lot of hedge funds are built around (perceived) failures in EMH. Indexing is probably making investing more profitable for everyone else, although I doubt the effect is large enough to be significant.

I guess we'll know it's a problem when that statistics reverses itself.

WH=ho told you there is no bond indexing? That's absolute nonsense. I own such indices among other investments.

Vanguard has a number of bond market index funds. They probably don't reflect the whole market in the same way that the total bond market index funds do, but they do exist.

a hedge fund, by definition is supposed to hedge which means they don;t capture all of the gains, but they don't fall as much during declines. But overall, they are a bad deal after factoring fees. If you're a billionaire and you want to make 4% every year with minimal downside or upside

That $21.2 billion number includes the money hedge fund managers made investing their own assets. This is not just fees.

Most of these aren't bad, but they don't strike me as typical Motley Fool stuff. A few months ago I read a piece of Motley Fool investment advice in which they told people they should pick stocks to invest in by figuring out whether the business of the company in question was successful. Not a word about the stock price. So I've been following them casually in my local paper since then, and have yet to see the phrase "index fund" mentioned, though I may have missed it. If you could sue newspaper advice columnists for malpractice, they would be a prime target. An organization devoted to convincing small investors that they can successfully choose stocks to invest in does a lot of harm.

Morgan Housel's column is the the only thing I read on Motly Fool. Nothing against the website, its just that I am not into picking stocks and trying to beat the market.
I enjoy his columns and think they are full of common sense and good insights. FWIW.

Yep, I always found good common-sense advice there, but with that one inexcusable exception. I stopped reading them.

Comments about the upside of down ala Megan Mcardle and Gate's quote above are always popular and seem to be getting more so...but its all becoming a bit trite as well. Success can be a great teacher....you learn what works. So can failure......you learn what doesn't. I can get how in the current economic climate many people in the West would like to believe that their failures are actually in some cosmic or even practical sense really disguised successes but this seems more like therapy than wisdom most of the time. Sometimes (often?) you just fuck up and there ain't no silver lining.

+1

How does a free market find the clearing price for something? Because a previous price failed to clear, and instead of withdrawing the offer, the price was adjusted. Without failure, there would be no adjustments, no finding of that clearing price.

Every advancement in science or practice comes from a failure. Something didn't work as expected, and a solution was found, many times after multiple failures.

What these comments do is challenge a notion that you can get it right. If only you just prepare well, do all the proper things, it will go well. Maybe. But in any endeavor that is complex, the way failure is handled makes the difference between success or it not happening at all.

I don't see why it is controversial except to those who live in some bubble, or see it as black and white. I've done a bit of computer programming, and the first thing you learn is to expect failure and develop techniques to minimize them and make it easier to find them. Photography is my hobby, one of my challenges last summer was to get a shot of a bat. I failed about 5000 times, but succeeded twice. My work requires me to enter challenging failures and come up with solutions. The solutions are often a factor of persistence, not throwing up my hands and walking away, but facing my lack of knowledge, double checking all my assumptions, to see what I missed. I succeed through bloody mindedness more often that some illusive mastery of the universe.

Democracy works because it provides a clean way (no blood) to get rid of failures. The free market works not because there are amazingly honest and smart people running things, but because it viciously punishes bad ideas, removing by failure most of the bad ones and letting the better ideas come to the fore.

And yes, there is often no silver lining personally, but your screwup makes the world better for others. A really good restaurant market, where there is choice and excellence is characterized by lots and lots of failures. It sucks to be the one who failed, but it is quite nice to be in the market for a meal in places like that.

In a recent interview about his book, Peter Thiel said that success not failure begets success, that failure merely discourages. The idea that failure builds character is more than trite, it's a myth, peddled by snake oil salesmen. It's like suffering, peddled by snake oil salesmen as the path to salvation.

As someone who has failed I can assure you that it does indeed build character.

But does the data support your case as typical? I think the losers that live in ghettos all across America is evidence to the contrary.

When winners lose, it builds character. When losers win, they're sore winners.

In any endeavor there are far more downside risks than upside. To succeed is either a matter of luck; not falling into holes, or extraordinarily good execution where all the risks are identified and avoided. Extraordinary good execution is a skill learned by having fallen into a few holes. I'm training a couple guys in a technical trade, and a good tradesman knows all the mistakes and works to avoid them. How can you know all the mistakes unless you have done them, watched someone do them or be taught (and listened carefully)?

And interestingly, I have been involved with training for a few years, and some have quit because they couldn't take failure as a learning experience.

Derek - what you say is really referring to experience, not failure per se. Experience is needed to know how to execute anything complex because it is not feasible in many cases to build a model of the process you are going to execute and use that to a plan. Most real life endeavors are too complex to model with many many factors, some of which are important and some of which are not. The only way to know which ones to pay attention to, is to execute, ideally more than once. This seemingly trite observation is actually the underlying basis for most of the way we organize our society and capitalism itself, which is all about specialization.

I'd agree, but it is failure. It feels like failure because it is. And the difference between those who succeed and those who don't are about how failure is handled.

I read something a while ago where it described business school students learning how to make decisions where they had 40% of the information needed to make one. Someone said in the real world you have 5%. That means you have a very good chance of failing. The alternative is to go home and eat on food stamps.

So failure, or put it in a more modern way, is risk. So you structure your approach to minimize the downside of failure; if all goes to hell, first you survive, second you limit the damage, third you come out looking like a savior. I've worked with people who do this all the time.

I have also worked with people who can't learn things because to learn means to admit that you don't know, and to try things means that you probably will fail many many times before you figure it out and succeed.

...however, the poor and the rich have something in common, which is a bit different from the middle class in general: they are more willing to tolerate risk.

Some people react to their failures in such a way as to increase their chance of success in the future. But not everyone does.

If you want to get more financial aphorisms or heuristics, and see the psychological bases for them, you might want to look at Ackert and Deaves, "Behavioral Finance: Psychology, Decision-Making, and Markets". After you pay for this expensive book (sunk cost) you will let the book remain on your shelf because you do not wish to recognize the loss, but then you become gratified later because there is a blog on this subject and you can show people you have the book even though you haven't finished reading it.

It is a good book, though. I have grown attached to it, which is an endowment effect, and would not sell it unless you offered me more than I paid for it.

+1. Thank you for this. I'm still grinning.

The cheapest copies listed here:

http://used.addall.com/

are $28.06 and $31 in softcover. The former is in Canada, hence the odd price due to currency conversion. Not cheap, but not especially pricey.

new, $170. I would not sell you my copy for less.

none of these aphorisms are that useful and have plenty of counterexamples.

1. Saying "I'll be greedy when others are fearful" is easier than actually doing it.

Those who were fearful and sold Enron as it fell from $70 to $50 missed the final bottom of $0.

"buy then there's blood in the streets"

Citigroup seemed pretty bloody when it fell from $50 to $30 in 2007, but the actual bottom was $1, and so on. There’s too many examples to count when buying when the streets were bloody only yielded more blood.

Investors have an expression, "catching a falling knife". Some stocks are in such a free fall that investing in them is not worth the risk.

Here's one I've just coined: "A winging investment is rarely a winning investment". Put otherwise: airlines usually go bust.

Excellent. Thanks for sharing.

Morgan H. is always a pleasure to read.95% of investing commentary is sheer hucksterism and he is one of the rare exceptions keen to repeatedly emphasise sound advice.

The original Motley Fool book spends the first half talking about why index funds beat mutual funds.

Financial advice suffers from the same problem as exercise advice: there is hardly ever anything new to say. Anyone writing a regular column has to start making shit up.

Agreed. I've just deleted bookmarks for three personal finance websites because, although rather good, they keep singing the same songs.

I'm not sure what TMF is getting at. There are still a lot of solvent auto companies, many of which include firms that were around for a long time. For example, the five rings of Audi, (part of VW group) were once individual manufacturers. Similarly, GM consisted of other companies such as Buick and Oldsmobile. While it went insolvent, it didn't go insolvent for a long time after 1909. So if you invested in Buick back then you might have been OK.

A bunch of other stuff also happened, for example Rolls Royce makes aircraft engines, EDS was owned by GM and since spun off, and so you would end up with a bunch of pieces of companies that do other things.

But of those 272 auto companies, how many would've been "good investments" if you had put money in during 1909? Probably a lot more than 3.

Plus, it implies that GM's 2009 bankruptcy was somehow relevant to the theoretical 1909 investors. Not unless one of the investors was Methusaleh.

102. Since last July, elderly Chinese can sue their children who don't visit often enough, according to Bloomberg. Dealing with an aging population calls for drastic measures.

In the USA we let the IRS do it. If you do not pay your taxes for SS and medicare you are in trouble. We just like to think we are different.

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