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A golden rule of investing is to understand what you are buying. How can you possibly understand a company unless you spend time analysing it – looking at its strategic position, the quality of the managers, its financial position, and so on?
Instead of that hard graft the inverted-commas-investors – who should really be called speculators – buy on the basis of what they read in an article (“the writer must be smart, so I go with that”), or they fancy that segment, “lithium is on the rise so I’ll buy anything connected with lithium”, or with solar panels, and so on, and so on.
The strange thing is people are not like this in ordinary life. If they are buying a new car they’ll gather loads of info; if they are thinking of new computer they’ll turn to WHICH? But when it comes to spending ten times as much on some shares they give it about five minutes and most of that is relying on other people’s thinking.
Peter Lynch, one of the greatest ever investors, observed the same human tendency to self-contradiction 29 years ago. In an interview back then he noted “The public, when they buy a refrigerator they go to Consumer Reports. They buy a microwave oven, they do that. They ask people what’s the best kind of radar range or what kind of car to buy. They do research. On apartments. When they go on a trip to Wyoming, they get a Mobil travel guide or California. When they go to Europe, they get the Michelin travel guide.” (Peter Lynch 8 October 1994 Lecture to the National Press Club)
But, observed Lynch, it’s different with shares: “People hear a tip on a bus on some stock, and they’ll put half their life savings in it before sunset. And they wonder why they lose money in the stock market. And when they lose money, they blame it on the institutions and program trading. That is garbage.
“They didn’t do any research. They bought a piece of junk. They didn’t look at the balance sheet and that’s what you get for it. And that’s what we’re being driven to and it’s self-fulfilling. The public does terrible investing and they say they don’t have a chance. It’s because that’s the way they’re acting. I’m trying to convince people there is a method. There are reasons for stocks that go up.”
Prof Glen Arnold now offers a Managed Portfolio Service at Henry Spain Investment Services under which clients’ portfolios contain the same shares as his (write to Jackie.Tran@henryspain.co.uk)
