Insights and Thoughts from Dorfman Value Investments
John Dorfman writes a syndicated column that appears weekly in Forbes.com, GuruFocus.com, Ohio.com, the Omaha World Herald, the Pittsburgh Tribune Review and the Virginian Pilot. In it, he tries to provide original, profitable stock ideas for readers. In contrast to almost all other investment columnists, he systematically reports on past results, both good and bad.
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Stock Market Sayings Often Have Kernel of Truth
Posted: August 09, 2022
August 8, 2022 (Maple Hill Syndicate) – Stock market sayings often have a core of wisdom – and sometimes a grain of falsehood. Here are some market quotations you’re likely to hear.
Buy on the Cannons, Sell on the Trumpets.
This saying is often attributed to Nathan Rothschild, a London financier in Napoleon’s time (around 1810). Scholars cast doubt on whether he said it, but that’s neither here nor there. Buying on bad news is often an astute way to invest.
It’s similar to a saying from Warren Buffett, often considered the greatest living investor: “Be fearful when others are greedy, and greedy when others are fearful.”
Most people see the logic of this approach, but few have the guts to implement it at a time when concerns run rampant. A recent example: On March 13, 2020, President Donald Trump declared Covid-19 to be a national emergency. If you had bought stocks that day, a year later you would have been up about 48%.
No One Ever Went Broke by Taking a Profit
This one is sometimes attributed to Bernard Baruch (1870-1965, financier and advisor to President Woodrow Wilson) and sometimes to speculator Jesse Livermore (1877-1940).
While the statement is true (tautologically so), it can be misleading. Suppose you bought Microsoft on March 31, 1986 and sold three years later. You had a nice profit, 263%. But if you had held on until 2000, you would have had a 55,536% profit.
Or suppose you bought Nvidia Corp. (NVDA) ten years ago and sold a year later. Your profit: 7%. Had you hung on for the full ten years it would have been 5,771%.
A directly opposite saying is, “Cut your losses and let your profits run.” (Author unknown.) I don’t endorse either saying. I think you have to make a stock-by-stock judgment, based mainly on what you think the company’s prospects are, not on past price action.
Sell in May and Go Away
This saying goes back at least to mid-19th-century Britain. For many years, it was largely true in the U.S. market. Up to 2012, the bulk of the market’s gains came in November through April, and results were much weaker in May through October.
In the past decade though, as a study by Ned Davis Research shows, the results for the two periods have been very close: 5.7% on average for the weaker span, and 6.0% for the stronger one.
This isn’t surprising. Whenever a simple rule in the stock market is found that works, people change their behavior accordingly. And then, the effect is likely to diminish or vanish.
The four most dangerous words in investing are, it’s different this time.
Sir John Templeton, one of my investment idols, said this. Sure, it’s always possible for the stock market’s patterns to change. But in my experience, history tends to repeat itself, with variations.
If you’re in the market, you have to know there’s going to be declines.
Peter Lynch, who compiled a fabulous track record as manager of the Fidelity Magellan Fund, said that in a television interview.
He went on to say, “Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in the corrections themselves.”
I agree with Lynch. There will be recessions, and there will be bear markets, but even expert economists are poor are predicting when they will take place. It’s usually wise to stay fully invested.
The function of economic forecasting is to make astrology look respectable.
That one comes from the economist John Kenneth Galbraith. I can testify, based on the Derby of Economic Forecasting Talent (DEFT), which I’ve run for many years, that both amateurs and financial professionals consistently miss turning points in things such as oil prices, interest rates, inflation and economic growth.
The Market Climbs a Wall of Worry
This one is my personal favorite. Just think of the traumatic events this country has endured. A terrorist attack on the World Trade Center and the Pentagon in 2001. Harsh recessions in 1981, 2008 and 2020. A pandemic since early 2020.
Throw in wars in Iraq and Afghanistan, troubled relationships with Russia and China, political discord within our own country, and several bear markets in stocks.
With all that, you might think that stock-market returns have been poor. Far from it. Through July 29, 2020, stocks have returned an average of 10.04% over the past 30 years, 10.84% over the past 50 years, and 10.71% over the past 70 years.
John Dorfman is chairman of Dorfman Value Investments in Boston. He can be reached at firstname.lastname@example.org. He or his clients may own or trade stocks discussed in this column.