Wall Street, wrote a satirist, is full of experts who have never been wrong once — in retrospect. But as this year winds to a close, let me reflect on the wisdom of someone who was rarely wrong, even at the time.
My old friend Peter Bennett, a money manager based in London, died last summer. He was in his late seventies. He handled money for a small number of wealthy clients, and kept a low profile. And he had managed the astonishing trick of beating stock-market indexes over decades, in all kinds of environments, with much lower risk.
He achieved this without any special access or technology or information. He had an MBA from Wharton, but he kept it all simple. He once turned down the offer to write a book about investing because, he said, “everything you need to know probably fits on one piece of paper.”
When I look back at all our lunches and dinners, and the strategy bulletins he would send, I realize that his market wisdom came down to a relatively short list of useful insights. Peter was always on the side of the individual investor trying to best the sharks on Wall Street and in London’s City. Here, in his memory, are Peter’s guiding stock-buying principles:
1. Buy low(ish), sell high(ish): Peter used to say this over and over. That’s the goal. If that sounds too obvious to bear repeating, just look at all the people on Wall Street and elsewhere who chase booming markets and jump on bandwagons. They buy high, and often end up, later, selling low and at a loss.
2. Be wary of every new big thing: No exceptions. Wall Street is always pushing a “new era” or “new paradigm” or “new supercycle,” but for investors it’s typically just the same old story. Instead, keep your head and keep the long view. Markets revert to the mean. Things come around again. Human nature doesn’t change.
3. Participate in a crazy market bubble if you want: I remember Peter coining money for his clients during the dot-com madness, even though he knew it was going to collapse. But for heaven’s sake get out quickly as it turns.
4. Never, ever confuse short-term trading and long-term investment: If you’re trading know the hope of a quick profit, you absolutely must be disciplined. Set a sell trigger beforehand — such as a 20% price drop — and stick to it ruthlessly. Not doing so — and even worse, relabelling a losing trade as a “long term investment” and hanging on — is the road to perdition.
5. Don’t give the blue-chip investment crowd too much respect: They are overly conventional, they move as a herd, and their first goal is protecting their careers — not your money. This is true of investment managers and analysts. Their analyses are generally superficial and ill-informed. Their forecasts are just to impress the clients. If, for example, these people are bullish about the continued upward march of the Dow Jones Industrial Average DJIA, +0.46% and teh S&P 500 SPX, +0.36% , you must be cautious — and vice versa. Peter, for instance, viewed the big year-ahead market forecasts each January as contrary indicators.
Look for investments the blue-chip crowd is too afraid to buy.
6. Avoid the latest fashions: When money managers are bragging about how much of a certain top-performing asset they own (tech stocks in 1999, banks in 2007, emerging markets in 2011), it’s time to sell.
7. Look for investments the blue-chip crowd is too afraid to buy. Peter bought Japanese stocks at the bottom five years ago, for example. “The average money manager would rather suck a lemon than invest in Japan,” he told me at the time. That market has since doubled.
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8. Do your homework: Read newspapers. Read research documents. Read everything. Most people on Wall Street don’t, and that’s how you can beat them. Read history — of business, of Wall Street, and pretty much of anything else. Peter always said it was more important for a new investor to learn about the history of Wall Street than to learn about finance.
9. Buy any durable asset class once it’s fallen about 67%, or two-thirds, from its peak: If you do, and you hang on, there’s a good chance of doubling your money on the way back up over the next five years. But you may have to be patient, and keep your nerve.
10. Keep it simple: Avoid any complicated investment scheme, plan, or technique. Peter said the older he got, the more convinced he was about the perils of being too clever. When he was bearish, he didn’t try to short the market. He just held a lot of cash. If he was bullish of a market he typically didn’t try to pick individual winners. He usually just bought the index.
Superior knowledge can bring superior returns.
11. You can beat the market with small caps: Peter consistently made good money by investing in companies he knew and understood well, especially if they were too small to interest the big money crowd. Superior knowledge can bring superior returns.
12. There are no absolute certainties: “Nothing in this business is ever — ever — more than 80% certain,” Peter liked to say. “So never bet the house.” He typically seemed to bet around 5% to 10% of a portfolio in a particular position. He never took big, crazy gambles.
13. Be careful out there: As Peter was fond of pointing out, it takes a 100% profit to recover from a 50% loss. So he always placed “return of capital” above “return of capital.” And he was never afraid to hold a lot of cash and equivalents to make that happen.