Warning: Do this! By John Mangun - February 28, 2018

“IF symptoms persist, see a doctor.” “Read instructions before using. If you cannot read these instructions, do not use.” “Do not put any person in this washing machine”.

Almost everything comes with a warning label these days because, apparently, comedian George Carlin was right: “Think of how stupid the average person is, and realize half of them are stupider than that.” “Caution: Coffee is hot. Avoid pouring on crotch area.”

Unfortunately, there does not seem to be a warning label for stock market investing. Most investors usually do not get any farther than some inspirational wisdom, such as from Warren Buffett: “I buy on the assumption that they could close the market the next day and not reopen it for five years.” Interestingly, everyone that uses his quote always excludes the first sentence of what he wrote: “I never attempt to make money on the stock market.” Buffett never invested in stocks; he only bought companies.

Most of the rules for stock investing are about as valuable in real life as what was on the business card of Genghis Khan found at the bottom of one of the mountains built from the skulls of his dead enemies. “Hate the sin but love the sinner.”

Here are my suggestions for stock investing warning labels.

“If you are going to ‘buy and hold’ then buy and hold.” You hear this mantra over and over about staying in for the long term and proponents
give example after example of where this strategy is effective. Here is the reality.

Almost every investment strategy works if you follow it. The truth is that every time the Dow Jones Industrial Average has dropped by more than 10 percent, huge net outflows for retail—read the “little guy”—investors has happened. By definition a 10-percent decline is a “correction,” not a “bear market.” Remember that Mike Tyson quote about being punched in the face? Winners stick to the plan no matter how difficult.

Every investor knows deep in his heart that taking a small loss is better than taking a large loss. But the only way you can do that is by cutting a losing position. So remember, “Warning: Paper losses are real losses. Your portfolio is only worth what you can sell it for.” Understand that your loser may not come back. And even if it does, a stock that is down 50 percent has to put a 100-percent gain just to get back to even.

The other side of this is, “Paper profit is your money. Treat it with respect.” Letting a profitable position “run” does not mean letting it run into a loss. Further, if you find P100 on the ground, go buy Lotto tickets. Why not? But if you receive a salary increase that you worked for, are you going to use the added income to play the Lotto?

“Warning: A good company is not necessarily a good stock.” The only thing worse than buying a good company with a bad stock is finding out the love of your life is actually your cousin. Some great companies are terrible stock investments. Some terrible companies have great stocks over a short term. Try not to confuse the two. While fundamental analysis will identify great companies, it does not take into account market and investor sentiment. Stock prices do not go higher unless investors buy. And frequently, investors do not buy the stock of “great companies.” Go with the flow.

Finally, “You cannot fight the market.” You must control your stock investments. Do not let the market control your portfolio. Otherwise, you might as well buy Lotto tickets.

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Please e-mail questions and comments to mangun@gmail.com. Visit my web site at www.mangunonmarkets.com. Follow me on Twitter@mangunonmarkets.

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