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As an investor, I’ve learned many lessons over the years. One of the more important lessons is to be leery of repetition.
If I hear a word, phrase or concept repeated often to explain similar phenomena, I immediately question the worth of the commentary. Repetition is a mental shortcut. It allows the commentator to explain a cause-and-effect relationship, even though he might be unsure of the relationship (or he might simply be attempting to fill space).
Below are five common investing concepts you should consider ignoring. They fail to impart any insight, yet their use is ubiquitous.
- Fear
This word is most often used after a hard market sell-off or the bursting of an asset-price bubble. As in, investors are fearful, so that’s why the hard sell. Unfortunately, fear is wrongly used as a synonym for uncertainty.
An investor is more often uncertain, not fearful. And he is usually uncertain, and rightfully so, after the bursting of an asset-price bubble because he is unsure of the government’s response. Will interest rates rise or won’t they? Uncertainty keeps the investor on the sidelines, not fear.
- Greed
The word “greed” is frequently viewed as the opposite of fear. E.g., it was greed that led to an asset-price bubble or an unsustainable increase in investment value.
But overpriced markets occur not because of greed, but because of investors acting on outside incentives. The federal government pushes interest rates to zero and stock prices soar. Investors aren’t greedy; they are simply seeking return and income. Reacting to incentives isn’t greed.
Greed is also incorrectly used to denote ambition. The two are not the same. The latter, ambition, means working to get what you want; the former, greed, is an attempt to get something for nothing. Most investors and analysts are ambitious, not greedy.
- Probabilities
If an analyst says, “There is a 40% chance of the economy falling into recession,” that analyst is proffering nonsense. Economies and investments are not a gamble like the roll of a fair die, where you know there is a 16.7% chance of hitting any number.
Economies and investments deal mostly in uncertainty, not risk. Uncertainty is unquantifiable, because uncertainty deals with unquantifiable human action. Risk, like the chance of a house burning down within a five-mile square, is quantifiable, because it is not influenced by deliberate human action.
Therefore, ignore prognostications like, “Apple has a 70% chance of hitting $150 within the next three months.” There is simply no way of knowing.
- Market Efficiency
Market efficiency should only refer to ease and cost of exchange between individuals. Instead, market efficiency is used to reflect fully and realistically all that is known about a company.
If markets are truly efficient, as some academicians believe, then there would be no Warren Buffett. It is impossible to know the amount of information embedded in a stock price.
- ‘Markets Acting’
Any reference to a market doing anything is wrong. Markets aren’t actors. A market isn’t even really a place; it’s a process of exchange that individual undertake.
When a commentator says something like, “The market sold off today,” he is talking about the activity of many individual investors and then ascribing that to “a market.” To refer to the market doing anything on its own is to talk of the market as if it were an acting entity, which it isn’t.
Markets reflect the actions of individuals; the markets themselves do nothing. The distinction is worth remembering, because there is rarely only one reason for why the market numbers ended the day up or down. All individual investors don’t act on the same information.
I don’t mention these mental shortcuts to point fingers. I’ve been guilty of invoking them myself on occasion. The key is to become aware of the habit, and not be fooled into thinking a cliché is an insight.
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