It’s easy to get overwhelmed with different ideas or opinions on what you “should” be doing in basically every aspect of our lives. Are you eating enough protein, enough fat, too many carbs, too much meat, drinking too much coffee and not enough “mud?” Do you have plastic cutting boards or use chemical-based cleaners, or use a manual toothbrush? It’s easy to be overwhelmed and confused, and even frustrated. We’re with you!

Investing isn’t too different. Are you saving enough? Too much? Taking the appropriate amount of risk? Are you adopting new investment products?

Lots of people and pundits have strong opinions on what you “should” be doing. While we have an approach that we like and think works for most people, rather than get on our soap box to preach our approach, we thought it could be more fun to take a page out of the late great Charlie Munger’s affinity for inverting a problem or idea to understand it better.

So, if you want to be an unsuccessful and probably very stressed-out investor, here are some recommendations:

• Try to time the market
  • The market goes up and down and has barely more up days than down days. So why invest when things are going down or could go down? Pick and choose your days to be invested.
• Change strategies regularly
  • If your strategy isn’t working right now, it must be broken. Try something different but do it quickly in case that doesn’t work either. TikTok has a bunch of ideas. YOLO.
• React to headlines
  • The market can be impacted by news flow, so why not take advantage by reacting to headlines faster than everyone else?
• Chase performance
  • When you’re hot, you’re hot. Find what’s hot and pile in! Why get left behind when people are all piling into the latest moonshot?
• Ignore taxes and fees
  • When you are locked-in day trading and scouring your X feed for actionable headlines, who has time to think about taxes? Who cares if all your trading gains are taxed as ordinary income. And if you get the distinct privilege and opportunity to invest in a hedge fund or private equity that charges 2% management fees and 20% performance fees, just say yes before the opportunity vanishes. They must be really good if they can charge that much!
• Think you have more information than whomever you’re buying/selling from
  • You are smarter and more insightful than average—everyone is! You’ve done your homework, and you know that when it’s time to buy/sell a position, whomever is on the other side of the trade is surely making a mistake.
• Ignore fundamentals
  • Who cares if a company makes money so long as the stock is going up? Yes, they’re handing out shares left and right to all of their employees and directors, but that’s what we call shareholder alignment, and that will undoubtedly make up for the ownership dilution. Don’t waste your time on balance sheets. If a stock is going up, the market is telling us that debt isn’t a concern today, tomorrow or ever.
• Allow political beliefs to influence your investment outlook
  • Who is sitting behind the Resolute Desk in the Oval Office is paramount. If you love (hate) the President, put your money where your mouth is and add risk (go to cash). Economic cycle, shmeconomic cycle.
• Make emotionally charged decisions
  • Trust your gut. Always. If there’s “blood in the streets” it’s because something horrible is happening and bound to keep happening. When things are good, the sky is the limit. Objects in motion stay in motion, right?
• Get emotionally attached to positions
  • Buy and hold has been a proven strategy for many investors. Said another way, do not sell. Ever. Plus, selling something at a loss sucks, so wait for it to recover.
• Follow the herd
  • Why do a lot of critical thinking when you can ride along with everybody else. At least if you’re wrong, you’re wrong together.

If you got through that and you are wondering why we think this is bad advice, you’re in luck, here are some counterpoints:

• DO NOT: Try to time the market
  • Sure, it’s almost a coin-toss if markets are up or down any given day, but since 1928, markets have been up 70%+ of years, and over longer time intervals, returns have been positive more often. Of course, there are periods of market weakness, but accurately predicting a top and (just as important and difficult) the bottom, is basically impossible to do reliably.
• DO NOT: Change strategies regularly
  • We haven’t found an investment strategy yet that works in all market conditions. Even strategies based in good reason and strategy will have lulls, but abandoning a game plan as soon as it falters is a likely way to trip repeatedly to lackluster investment results.
• DO NOT: React to headlines
  • Three important thoughts here:
    • Markets are forward-looking and are constantly incorporating different possible outcomes.
    • With the constant and lightning-speed dissemination of information, there is a lot of “breaking news” that is more noise than signal. Regardless of whether signal or noise, supercomputers digest information faster than you can read it, so it’s a fool’s errand to try to outrun them.
    • Sometimes the market moves counterintuitively. We’ll always remember the market surging as the CDC named COVID-19 a global pandemic.
  • DO NOT: Chase performance
    • Similar to the caution of changing investment strategies haphazardly, chasing the latest investment fad, hot stock, or hot investment manager is perilous. Reversion to the mean is a powerful force. Sustained outperformance is incredibly uncommon, and by the time you decide to hop on the wagon of what’s been most successful recently, the remaining upside is likely limited. As an analogy, in pari-mutual bettering at a horse track, betting on the heavy favorite has limited payoff, especially as more people make the same lopsided bet.
  • DO NOT: Ignore taxes and fees
    • While some accounts are tax-advantaged, taxes are inevitable in life and investing and they can have a material impact on your wealth. We discourage investors from making decisions solely because of tax considerations, though they should be part of the decision-making process because it is a real and sometimes significant drag on compounded returns. Similarly, management fees and fund expenses eat directly into returns.
  • DO NOT: Think you have more information than whomever you’re buying/selling from
    • Markets connect willing buyers and sellers. Whenever you trade, there is a counterparty taking the opposite side of your trade using the information available to them, and it’s probable they’re at least as informed as you are, so it can be helpful to think about why they might be doing the opposite as you.
  • DO NOT: Ignore fundamentals
    • Benjamin Graham, a legendary investor and teacher to Warren Buffett said that “In the short run, the stock market is a voting machine but in the long run, it is a weighing machine.” Said another way, short-term fluctuations are based on supply and demand and can be a popularity contest, but over time, the market will identify and reward companies of substance.
  • DO NOT: Allow political beliefs to influence your investment outlook
    • We have written about this in a couple of our newsletters. The evidence is mixed at best that the political leadership of the Oval Office has any meaningful impact on stock market performance. Additionally, we believe presidents often receive more credit and blame than they deserve for economic performance. Bottom line, your investment horizon is probably longer than any political term.
  • DO NOT: Make emotionally charged decisions
    • Fear and greed are commonly cited in investing. At times, “the market” (all participants in aggregate) can seem overly greedy or fearful, but it can also apply to individuals. Taking too much risk (i.e. being greedy) or not taking enough risk (being fearful), can pose significant challenges for an individual’s chances of achieving their financial objectives.
  • DO NOT: Get emotionally attached to positions
    • Defining an emotional attachment to a position is challenging, but it can manifest in a number of ways. Refusing to sell a loser is one form of emotional bias that can be detrimental. Another is holding onto too much of a winner so that it becomes an outsized risk to your portfolio. Try to objectively review each position in your portfolio with the lens of “if I didn’t own it, would I buy it today?”
  • DO NOT: Follow the herd
    • This overlaps with chasing performance or allowing emotions to dictate decisions, but contrarian thinking is invaluable in better understanding your own investment objectives and rationales. Hopefully this blog provides an example of how flipping an idea on its head can help you understand it better!

If you have any questions about this blog, or other questions about your finances, please contact Blue River Capital Management at 503.334.0963 or at info@brcm.co.

This information is intended to be educational and is not tailored to the investment needs of any specific investor. Investing involves risk, including risk of loss. Blue River Capital Management does not offer tax or legal advice. Results are not guaranteed. Always consult with a qualified tax professional about your situation.