3 Terrible Investment Lies
Are you falling for them?
There’s a lot of investment advice that sounds smart and simple, which is why it is being repeated over and over again.
But once in a while, I stumble upon quotes that are useless, and potentially harmful.
Here are my top 3.
1.0 Buy Low, Sell High.
This is pointless on many levels.
First, I don’t know anyone who intentionally does the opposite, and needs to hear this to change their approach.
Second, it implies that you can time the market, by buying at the absolute bottom, and selling at the absolute top, which of course, is not the case. Even the best investors don’t pretend to do that.
Lastly, if you are a long-term investor, the current or all-time “high” doesn’t mean the company is overvalued and you should sell.
The quote won’t help you, at all.
2.0 Diversify, Diversify, Diversify
Some great capital allocators have beaten the market by concentrating their portfolio in a few holdings.
Other great capital allocators have beaten the market by having tens of different holdings in their portfolio.
Both approaches work.
But neither should be treated as a starting point. They’re the result of a clear investment philosophy and risk tolerance.
The phrase “diversify, diversify, diversify” implies there’s only one right way to invest. That’s misleading. It encourages some retail investors to spread their money too thin, adding positions they don’t fully understand just for the sake of appearing “balanced.”
If you’ve identified 10 great opportunities (which already takes a lot of work), adding 5 mediocre ones for the sake of diversification is more likely to hurt your returns.
You might end up with a diworsified portfolio, one where the risk-return tradeoff is worse, not better.
3.0 A stop-loss will always protect you
A stop-loss automatically sells your stock if it falls to a certain price, acting like a safety net. This is the definition that trading platforms use.
The truth is, stop-losses are for people who have no idea what they are buying.
If you have done your homework, you own shares in high-quality companies, then:
You won’t be bothered by the short-term movements (positive or negative); and
A significant price decline allows you to purchase more
I have never heard of great investors like Buffett, Munger, or Lynch, relying on stop-losses.
They don’t need them.
Because they know why they own what they own.