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Let in the gamblers and bookies but don't call it investment

A lot of people have written articles about how to succeed in the sharemarket. Here's one about how not to (for want of a less polite expression) "fail" in the sharemarket.

A lot of people have written articles about how to succeed in the sharemarket. Here's one about how not to (for want of a less polite expression) "fail" in the sharemarket.

Take two "investors". A long-term investor and a short-term trader. Which one is more likely to succeed?

Well, as any stockbroker can tell you, when it comes to survival, there are far more long-term investors than there will ever be short-term traders.

But what they may not point out is that the more enduring nature of the long-term investor is not a function of the fact that they succeed at investing it is a function of the fact that they are patient and patient people make fewer stupid mistakes. Not mistakes like picking the wrong stocks, underperforming or misreading the market but stupid mistakes, terminal mistakes, mistakes that happen when you rush the market with unrealistic expectations about getting rich quick. Mistakes brought on by impatience are what separate the dills from the survivors.

Mistakes like these:

Get-rich-quick products

I used to be staggered by the survival of some of the products that now surround the sharemarket but I have mellowed. Now I put their continued existence down to the fact that people want to gamble, are allowed to gamble and the stock (and forex) market provides conveniently moving numbers on which to gamble. It's a perfect gambling medium so why fight it?

You can't ask everyone to be investment puritans so let them in - let in the gamblers, the bookies and their tricks. This is their market, too. But what I haven't mellowed to, and what shits me and my industry, colleagues and clients still, is that a lot of the advertisements present a gambling product as an investment product that they target not gamblers but a huge body of naive and vulnerable people who cannot - thanks to the appearance of these products in the investment space and to the unwitting endorsement of these products by trusted media outlets that should know better - distinguish between a product that is designed to screw money out of them and investment.

Using leverage

You don't need a lecture on leverage but what may add some value is to make the point that if you have $1 of debt but still invest in the sharemarket, you are leveraged. Investing while you have a mortgage, credit-card debt or loan is being leveraged and if the average return on the sharemarket is 4.1 per cent plus dividends, you must be a goddamn hero in a monster bull market to borrow money at 8 per cent post-tax (equivalent to 14.5 per cent pre-tax for highest-rate tax payers), invest in the sharemarket and come out ahead.

And that's before we take off inflation, tax, dealing costs, fees, trails and the index fudge. It is a basic mistake, especially in this environment, to think that it's clever to invest when you have debt. Thinking you can do better than paying it off in a bear/bore market is a rather hilarious fantasy. Pay off your debt, you goose.

Using derivatives

Classic beginner's mistake. Does everyone have to go through the whole cycle of experience and losses to learn that newbies speculating in derivatives is not clever or normal, or can you take someone's word for it?

Derivatives are not plain vanilla and not everyone is using them and there's a reason for that. The only people who survive the derivatives markets for long (options are just one of the derivatives markets) are professional traders, fund managers or sophisticated wealthy individuals writing call options against existing holdings. But you can trade derivatives if you like. Unrealistic expectations will do that for you.

Trading on charts

Why do you think the gambling arts invite you to a free seminar? To teach you to make $100,000 to $2 million a year like the average forex dealer, or to make you confident enough to trade their product? Hmm, let me think.

Can't afford to lose

I know a guy who can't move without assessing every possible outcome. Cannot step outside the front door without overthinking everything. He is paralysed by possible consequences and because of that is completely unsuited to the sharemarket.

The more fearful you are, the less suited you are to the sharemarket the less capable you are of effective decision making. Investing in fear of a loss renders you hopeless as an investor. If you can't afford to lose, don't play.

Financial patience or financial patient. Your choice.


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