What everyone knows.

My favorite Will Rogers quote: “It isn’t what we don’t know that gives us trouble, it’s what we know that ain’t so.”

There’s no better place to illustrate this principle than Wall Street. Stock prices reflect what everyone knows. The problem isn’t what we don’t know, but what we know that just isn’t so.

For example, everyone knows China is a growth engine and that everyone “should” be invested there. If everyone knows it, then stock prices already reflect that fact. If what everyone knows turns out not to be so, then a lot of people are in for a lot of disappointment.

Another example. Everyone knows the cable industry is toast because everyone will download TV and movies over the Internet for free. But, if everyone knows, then stock prices reflect that fact already, so no profits can be made betting against cable. In fact, if everyone knows it, and it turns out not to fully reflect the facts (how will all those people download all those movies and TV shows, perhaps over cable?!), then it might be possible to make money betting the other way.

Everyone knows that bonds and cash are safer than stocks. Perhaps that is why retail investors flooded into bond mutual funds last year and a lot of people pulled their money out of the market and put it into bank accounts. But, what if inflation comes back with a vengeance? What everyone knows will turn out to be very painful for, well, everyone.

What else does everyone know? Old line software companies are toast. Every Apple product is a blockbuster. Google will provide everyone with software for free just because, gee whiz, they’re such nice people. All airlines are lousy investments, always. Content providers will happily provide consumers with high quality entertainment for free over the Internet. Old line pharmaceutical companies are toast. Old line telecom companies are toast. Regulators can see problems coming and act to prevent harm. Global warming is occurring, caused by man, can be stopped, and should be stopped (the benefits outweigh the costs).

The trouble isn’t what we don’t know, or admitting that we don’t know. The trouble comes when what we think we know turns out to be just plain wrong.

A lot of money has been made over the years in buying the opposite of what everyone knows. It’s certainly worked well for me.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.

“buy some good stock and hold it till it goes up”

I recently got back from a trip to Rome. Wow, what an amazing place. I’ve spent the last several years learning all about ancient Rome, and making a trip there really capped it off nicely.

On part of the plane ride back, for there were many legs, I sat next to a nice man who is an architect.

In conversation, it came up that I was a professional investor. He commented that this must be a terrible time to be in this field, and I retorted that it’s a wonderful time because I’m good at what I do and the opportunities are legendary.

His response was that someone who sold several months ago would have proven brilliant.

I didn’t respond because I was dumb-founded that someone who seemed so intelligent was suffering from such powerful case of hindsight bias.

It reminded me of the Will Rogers quote, “take all your saving and buy some good stock and hold it till it goes up, then sell it. If it doesn’t go up, don’t buy it.”

Of course, Rogers was making fun of the concept of hindsight bias. He was poking fun at the people who think you can successfully invest by only buying things that went up in hindsight.

But, most investors seem to think that’s the way to make money. Just sell at the top and buy at the bottom. The problem is that no one can do this consistently. Some people have done it because they were lucky once or twice, but no one does it consistently. Even worse, the people who try are almost always doing worse than someone who just buys and holds.

People who try to sell at the top and buy at the bottom end up guessing on the roll of a die and either getting lucky or unlucky. That’s not investing wisdom.

A smart weather predictor doesn’t try to boldly guess the weather. They look at the facts, consult a lot of data, read a lot of history, and make judgments based on hours of analysis. And, even then, they use percentages to forecast how likely certain weather phenomenon are to occur.

The stock market is even more difficult to predict than the weather. There aren’t any successful investors who time the market, just like there aren’t any successful weather predictors who guess about the weather.

The secret isn’t to look into the past and wish you had timed things perfectly. The secret is to do analysis, consult history, and make bets where the odds are heavily in your favor–even though you don’t know exactly what will happen.

The people who try to sell high and buy low almost always end up doing the opposite, and their investing results and overall wealth reflect that strategy.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.