By Timothy Baker, CFP®, MBA
Investing has a language of sayings and catchphrases of its own. Some encourage action, others espouse knowledge. A novice investor might struggle to understand the meaning of many common investing phrases or be duped by seemingly true but false phrases. Here are some of the more well-known phrases, good and bad.
Hazardous Investing Phrases
"This Time It's Different"
We begin with what Sir John Templeton called “the four most dangerous words in investing: 'this time it's different.’” There are different interpretations of the quote, but most regularly it applies to ignoring history at your own peril. When in reference to the stock market, there’s always going to be unforeseen ups and downs, but over time, there will be more ups than downs.
Long-term disciplined investors have historically been rewarded for maintaining that discipline despite the opinions of pundits and prognosticators. (For more, see: The Greatest Investors: John Templeton.)
“Buy Low, Sell High"
This is probably the most simplistic expression, yet the most difficult in practical application. Namely, buying when things appear bleakest and selling when things look great isn’t exactly a natural human inclination.
In fact, looking at equity mutual fund cash flows through the years, the exact opposite is the tendency. The last market downturn saw massive outflows in 2008, reversing course in the latter part of 2009 well after markets went into recovery mode.
“I Got in Early”
Usually, you see this in reference to a perceived new investment idea. The issue is, it’s almost impossible to quantify the statement thanks to the speed at which information travels and is incorporated into prices. Simply put, an investor really has no way of knowing if they got in early and should most often work under the assumption that prices reflect all available information.
Similarly, “buy the rumor, sell the news” speaks to speculation on what could happen, while failing to comprehend how much of the “rumor” has already been factored into current prices.
“I’m Waiting for the Pullback”
This phrase suggests that prices are in some way inaccurate and an investor has the foresight to time the market perfectly in order to take advantage of a subsequent uptick. The perils of attempting to time the market are well documented.
The problem is that making a single accurate decision isn’t nearly good enough. To be successful, an investor would have to decide when to get in and when to get out multiple times over an investment lifetime.
“The Trend Is Your Friend”
This phrase is true...until it’s not. It means keep buying when it appears to be going up and start selling when it goes down. One of the biggest mistakes investors make is failing to recognize that markets operate on news, which is unpredictable. Essentially, there’s no way of knowing what is a trend and what isn’t.
“It’s a Market of Stocks, Not a Stock Market”
This classic day trader proverb implies that you can always make money providing you pick the right stocks. The issue with stock speculation is that the evidence of long-term success doesn't support the approach that active traders take.
“Bulls Make Money, Bears Make Money, Pigs Get Slaughtered”
This phrase demonstrates an active trader’s mentality that superior skill can make money in any market, but only within the confines of their own greed. Again, we see speculation on when to get in and when to get out, a short-term mentality that requires the daunting task of accurately identifying when a stock is over or underpriced.
"If You Don’t Understand It, Then Put Your Life Savings Into It”
Peter Lynch said, “There seems to be an unwritten rule on Wall Street: If you don’t understand it, then put your life savings into it.” Many of the financial products coming out of Wall Street over the years are bought and sold on the premise of being the next hot thing. (For more, see: The Greatest Investors: Peter Lynch.)
As rule of thumb, you should always know how your money is invested, complete with a thorough understanding of the potential risk, fees and liquidity associated with any investment vehicle. Don't invest in it just because it's popular or hard to understand. Do your research.
“If I’d Only Followed CNBC’s Advice, I’d Have a Million Dollars Today”
Jon Stewart, former host of The Daily Show, on the 2008 market downturn: “If I’d only followed CNBC’s advice, I’d have a million dollars today. Provided I’d started with a hundred million dollars.” Don’t’ put too much stock in the daily commentary from talking heads whose job is to keep you reading, listening or watching. Instead, focus on your unique situation and look for help from qualified professionals who have your best interest in mind.
Wise Investing Phrases
“I’d Compare Stock Pickers to Astrologers, But I Don’t Want to Bad Mouth Astrologers"
Rarely at a loss for words, the father of modern finance and Nobel Prize winner Eugene Fama speaks to the difficulties in identifying stock mispricings. Based on decades of data, studies have shown that the average actively-managed dollar is far more likely to underperform the average passively-manageddollar.
“When the Tide Goes Out, You See Who’s Swimming Naked”
Warren Buffet is probably the most quoted investor of our time with gems like “When the tide goes out, you see who’s swimming naked.” This references having a lack of diversification in your portfolio when markets pull back. In these instances, concentrated exposures in any one specific investment can spell disaster for a portfolio.
Other wise Buffet quotes include: “The most important quality for an investor is temperament, not intellect” and “Be fearful when others are greedy. Be greedy when others are fearful." These both speak to the well-known emotional tendencies of investors. Above all, patience and levelheadedness are two attributes that investors should hold in the highest regard.
"Markets Can Stay Irrational Longer Than You Can Stay Solvent”
John Maynard Keynes’ famous line “markets can stay irrational longer than you can stay solvent” has been used to describe a variety of scenarios not limited to the disposition of investors and the unpredictable nature of markets. We’ve been through five different bull and bear markets over the last 27 years, each with significant variations in how long they lasted.
"The Investor's Chief Problem, Even His Worst Enemy, Is Likely to Be Himself"
Author of “The Intelligent Investor,” value investing pioneer Benjamin Graham said this phrase. Most investors have emotional attachments to hard earned money, which can lead to decisions that are detrimental to long-term success. He also thought that “To be an investor you must be a believer in a better tomorrow.” It’s a basic prerequisite to believe that advancements in technology, standards of living, and ultimately profits will rise over time. Without this ideology, there would simply be no reason to invest.
"If You Have Trouble Imagining a 20% Loss in the Stock Market, You Shouldn't Be in Stocks"
Index investing pioneer and Vanguard founder John Bogle provided some simplistic advice in reference to having all your exposure to stocks: "If you have trouble imagining a 20% loss in the stock market, you shouldn't be in stocks." It’s critical to thoroughly understand your risk tolerance for market fluctuation. As your exposure to stocks increases, generally speaking, so does the level of risk in your portfolio. An investor should never take more risk than they can sleep with at night.
"Investing Should Be More Like Watching Paint Dry or Watching Grass Grow"
Nobel laureate Paul Samuelson said this, adding to it, "If you want excitement, take $800 and go to Las Vegas." There’s a difference between investing and speculating. The idea of being an investor is to grow assets over the long term. If you align long-term investment growth with short-term entertainment, you aren't doing much more than gambling.
The next time you hear one of these phrases remember to keep it in the proper context. Although all of them may seem sensible to a novice or even to a professional, it's important to be aware what each phrase truly means and how you should apply its logic to your investing strategy. (For more from this author, see: Every Investor Should Know This Boring Financial Term.)
Disclaimer: WealthShape, LLC provides this communication as a matter of general information. No one should assume that any discussion or information contained in this material serves as a receipt of, or as a substitute for, personalized investment, tax or legal advice.
This article was originally published on Investopedia.