The below was originally published on October 25th 2011. Enjoy! – JB
Could you walk into Caesar’s Palace, belly up to the first open blackjack table, hit on 19 and win the hand? Yes, of course you could. But would you? On a regular basis? No you would not. You’d either go broke very quickly or your fellow players would kick the leg out from under your stool.
I’ve witnessed every single mistake an investor could make since I came into this game and I’ve made most of them myself. The mistakes where it’s very obvious that the odds are against you before you even begin are called the Money-Losers. I’m going to over-generalize here in an effort to help MOST investors (not the elite) and you’re either going to nod your head in knowing agreement or you’re going to be an industry participant and yell at me. It doesn’t matter, I know I’m right and if you had no bias or “dog in this fight” then you would have to admit that I’m right also.
I’ve made a list of the money-losers below, if I’ve missed any feel free to tell me in the comments section….
1. Buying out-of-the-money naked options: Have fun, play the game, be merry, but just know that what you are doing is gambling, not investing. And unlike with a losing equity position (during which your holding period can be unlimited) with naked options the clock is working against you. 90% of the time you will lose whatever principle you put into the premiums, most of these expire worthless.
Naked options – that’s a money-loser!
2. Confusing your politics with your investing: Want to rant and rave about how everyone should feel exactly as you do about the issues? Go ahead. Want to bitch and moan when the wrong guy wins the election? You can do that too. You can also stay up late into the night arguing policy on internet message boards if you really want to. But don’t you ever think for a minute that your political opinions have any place in your investing (ie: “Obama sucks so I’m shorting the S&P” or “If Rick Perry doesn’t become King of America I’m selling everything” ).
Politics and investing – that’s a money-loser!
3. Playing the tertiary name. I see a lot of stockbrokers do this, it never works…If there’s a hot sector or an industry group of stocks you want to be involved with, try to only play the best or the second best names. The temptation to get into the tertiary name – “but it’s only trading at 6 bucks, if the leaders double this one could triple!” – is a total killer, you will be sorry. Especially if you end up being right on the thesis but you picked a bad company to express the trade with and they restate earnings or something you’ll be despondent about it.
Third-best names – that’s a money-loser!
4. Hiring an options advisor. Dude, you’re either in the market or not. If you’re in, the last thing you need is someone hedging away all your upside while killing you with trading costs simultaneously. Some of the most horrifying stories of churning I hear about these days involve these “covered call strategy” guys. It’s a scam, they don’t even know what they’re doing, the whole thing is just a huge tax on your portfolio. You’re basically capping your upside and then if the market gets killed, what’s the guy gonna say? “Well at least we brought in some premium and lowered your cost average.” Yeah, that’s great.
Option churning – that’s a money-loser!
5. Private Placements. Don’t be a f***ing idiot. Unless it’s your nephew, by the time a deal gets on your desk just imagine how many smarter, better connected people had to have passed on it.
Private placements – that’s a money-loser!
6. Currency trading. Let’s see…high leverage, inside and opaque markets, asymmetric information, light regulation, game mechanics, brokers who win when their customers lose, odd hours and magnified exposure to geopolitical events. What’s not to like? Again, with play money, knock yourself out. With money you expect to see again? No way.
Currencies – that’s a money-loser!
7. Listening to gut traders. The gut traders on TV, while colorful, are really just regurgitating things that make them sound smart – they are not helping you invest. The anchor asks them a question about a stock and then the way their minds work is “OK, let me respond back with that thing I just read about that company hiring a new CEO or reporting a good quarter.” And then they say back that one nugget of information they’ve got on company ABC and then the conversation moves on. You’ve just witnessed someone with great recall, that’s about it. Phrases like “great management” or “best in breed” are total bullsh*t, but that’s what the gut trader works with. When you hear things like “Oh, I heard that CEO interviewed the other day, he’s a terrific CEO, best in the biz!” then you know you’re listening to a gut trader. That’s so old school, no one really makes money that way in real life.
Gut traders – that’s a money-loser!
8. Confusing your time frame with someone else’s. The blogosphere is a wonderfully rich tapestry filled with investing and trading sites of every stripe, but understanding the fact that most trader-bloggers are focused on intraday and 2 or 3 day swing trades will save you a lot of aggravation. Are you going to put the trade on and then sit in front of the screen all day? Probably not if you’re like 99% of the investing public. Most likely your investments are meant for longer-term holds barring a stop-out or something major changing. You will be at work or in meetings during the day while markets move, you’re simply not equipped to trade with the real traders, n0 matter what that commercial on TV says. Bottom line: Don’t put them on if you’re not going to be around to manage them and take them off.
Trading someone else’s time frame – that’s a money-loser!
9. Knee-jerk Contrarianism. “The market is all betting one way so of course I’m betting the other way.” This works very well at major turning points, which are very rare. In truth, the herd usually outsmarts the remnant and you’re much better off being an ordinary zebra in the middle of the pack than straying off on your own into a deep ravine where predators lurk. If there is a turning point you see coming and you want to exploit it, fine – just don’t bet your life on it and deploy all your capital at once. Also, keep in mind that not everything mean-reverts, some things simply trend – some investments will simply never come back to where you wish to buy or sell them regardless of historic price points that might make sense to you. And being contrarian just for the sake of being different is not the same as being contrarian because you see something that others don’t.
Knee-jerk contrarianism – that’s a money-loser!
10. Betting on Jockeys. You can count the number of managers who’ve beaten the market over long time-frames and through multiple cycles on two hands and probably still have a finger or two left over. The heroes of one bear market are never the heroes of the ensuing bull market and on and on – even the best of us have our moments. Manager worship is scary-stupid. Especially when you consider that inflows to a fund typically peak exactly when the manager’s hot hand is at its very hottest. I could give you 100 examples of this now but you probably have a few of your own. This doesn’t mean the jockey riding the horse doesn’t matter, it means that the conditions of the track matter more over long stretches of time. Just as one should not chase asset class performance, one should also avoid “rock stars” and gurus no matter what kind of numbers they’ve put up recently because often times the outside variables that have contributed to that performance cannot and will not be replicated.
Manager worship – that’s a money-loser!
Anyway, these are ten things I don’t do. It’s not that they can’t work, it’s that they won’t over any appreciable amount of time.