Sunday, May 3, 2009

What every investor ought to know

... according to Marc Faber.

1. There is no investment rule that always works.

If there was one single rule, which always worked, everybody would in time follow it and, therefore, everybody would be rich. But the only constant in history is the shape of the wealth pyramid, with few rich people at the top and many poor at the bottom. Thus, even the best rules do change from time to time.

2. Stocks always go up in the long term.

This is a myth. Far more companies have failed than succeeded. Far more countries' stock markets went to zero than markets which have survived. Just think of Russia in 1918, all the Eastern European stock markets after 1945, Shanghai after 1949, and Egypt in 1954.

3. Real estate always goes up in the long term.

While it is true that real estate has a tendency to appreciate in the long run, partly because of population growth, there is a problem with ownership and property rights. Real estate in London was a good investment over the last 1000 years, but not for America's Red Indians, Mexico's Aztecs, Peru's Incas, and people living in countries which became communist in the 20th century. All these people lost their real estate and usually also their lives.

4. Buy low and sell high.

The problem with this rule is that we never know exactly what is low and what is high. Frequently what is low will go even lower and what is high will continue to rise.

5. Buy a basket of high quality stocks and hold.

Another highly dangerous rule! Today's leaders may not be tomorrow's leaders. Don't forget that Xerox, Polaroid, Memorex, Digital Equipment, Burroughs, Control Data were the leaders in 1973. Where are they today? Either out of business or their stocks far lower than in 1973!

6. Buy when there is blood on the street.

It is true that, very often, bad news provide an interesting entry point, at least as a trading opportunity, into a market. However, a better long term strategy may be to buy on bad news, which has been preceded by a long string of bad news. When then the market no longer declines, there is a chance that the really worst has been fully discounted.

7. Don't trust anyone!

Everybody is out to sell you something. Corporate executives either lie knowingly or because they don't know the true state of their business, and the entire investment community makes money on you buying or selling something.

8. The best investments are frequently the ones you did not make!

To make a really good investment, which will in time appreciate by 100 times or more, is like finding a needle in a haystack. Most 'hot tips' and 'must buy' or 'great opportunities' turn out to be disasters. Thus, only take very few investment decisions, which you have carefully analyzed and thought about in terms of risk and potential reward.

9. Invest where you have an edge!

If you live in a small town you may know the local real estate market, but little about Cisco, Yahoo, and Oracle. Stick with your investments in assets about which you may have a knowledge edge.

10. Invest in yourself!

Today's society is obsessed with money. But the best investments for you may be in your own education, in the quality of the time you spend with the ones you love, in your own job, and on books, which will open new ideas to you and let you see things from many different perspectives.

© Copyright 2009 by Marc Faber Limited - All rights reserved.

1 comment:

  1. 2. The myth that stocks always go up in the long run. So far as I'm concerned, if the latest example is from 1954, this point is somewhat suspicious. And I have no plans to invest in a place like Egypt any time soon.

    3. The myth that real estate goes up in the long term. People in countries that turned communist lost not only real estate, but also their stocks and all other decadent capitalism's investments. Also, I'm not clear on why Marc Faber mentions the loss of life here. While sadly true (either literally, or 'just' quality of life), it has nothing to do with the particular topic of real estate.

    4. The rule to buy low and sell high. Now I'm completely baffled about this so-called rule. My investment strategy, looking back, appears to have been as a rule buy high and sell low.

    5. The rule to buy a basket of high-quality stocks and hold. Just an aside, there are quality companies that prove the opposite (e.g., IBM). Quality also implies innovation and moving on with the times (IBM started with cheese-cutting machines and large clocks). Polaroid was a quality company before its products become out-of-fashion. I wouldn't invest today in a company that only produces horseshoes (any quality it might be).

    7. Trust no one, everybody is out to sell you something. True, but a bit paradoxical. What's Marc Faber selling here exactly?

    9. Invest in what you know first-hand. It's hard to know much about anything today, and you have no choice but to rely (to one degree or another) on expert opinion out there. Small town real estate may easily go into the ground when small town goes into the ground when big employer (say, Cisco) closes shop...