15 rules from a great investing mind: Mayers
Bernard Baruch was one of the great Wall Street players of the last century. His observations on stock markets and human behaviour offer timeless insights for investors.
By: Adam Mayers Personal Finance Editor, Published on Tue Jun 16 2015
Fifty years ago this week, in June, 1965, one of the great investing minds of the 20th century died.
His name was Bernard Baruch, he was 94, a multimillionaire, philanthropist, adviser to five U.S. presidents and a keen observer of human nature. Baruch coined the phrase “Cold War” in 1947 to describe relations between the Soviet Bloc and the West. One of his more oft-quoted lines is: “If all you have is a hammer, everything looks like a nail.” By which he meant, we see what we want to see.
He was born in South Carolina, the son of a doctor who moved the family to New York after the American Civil War. Baruch had made and lost his first million before he was 25, but recouped and then some within a few years. In 1902, on his 32nd birthday, he told his father he was worth $100,000 for each year of his life. That $3.2 million is the equivalent of about $86 million today.
Baruch became known as the lone wolf of Wall Street because he worked on his own, although at one time or other he dealt with the great financiers of the day, including the Guggenheims, J.P. Morgan and Andrew Carnegie. He came to the conclusion that the pursuit of wealth had little point unless the money was put to some good. So he left a huge charitable legacy, including money for medical research and scholarships at the City University of New York, his alma mater. During the First World War, he left Wall Street to become an adviser to President Woodrow Wilson. During the Second World War he helped Franklin Roosevelt mobilize the U.S. war effort.
His 1957 memoir, My Own Story, is a very readable journey through his life and its many lessons. It is available as an ebook or can be read for free online at the Open Library. (You’ll need to create an account.)
Here are 15 ideas from the book in his words:
How to buy stocks: Some people boast about selling at the top and buying at the bottom. I don’t believe this can be done. I have bought when things seemed low enough and sold when they seemed high enough. In that way I have managed to avoid being swept along to those wild extremes which prove so disastrous.
Why small investors fail: They (make) two principle mistakes. The first is to know too little about a company. The second is to trade beyond one’s resources, to try and run up a fortune on a shoestring. That was my main error at the outset.
On risk: There are no sure things in the market. There is no investment which doesn’t involve risk. But we all have to take chances in life.
On emotions: The main obstacle to investing is disentangling ourselves from our emotions. They are constantly setting traps for our reasoning powers.
Why stocks move: What registers in stock market fluctuations are not the events, but human reactions to the events. My career on Wall Street proved one long process of education in human nature.
On the value of mistakes: Baruch lost his father’s $8,000 life savings and was reflecting on what happened: “I never sought to excuse myself, but to safeguard myself from making the same error again. I began a habit I was never to forsake — of analyzing my losses to determine where I had made a mistake.” He then borrowed $500 more and turned that into a huge profit, repaying his father many times over.
Lesson from his biggest loss: I acted on unverified information after superficial investigation and got what I deserved.
When to sell: It is far more difficult to know when to sell a stock than when to buy.
On market psychology: During a Depression people believe a better time will never come. At such times a basic confidence pays off if one purchases securities and holds them until prosperity returns. Always in the past, no matter how black the outlook, things got better.
On independent thinking: Speculator comes from the Latin word speculari which is to observe and spy out. A speculator is someone who observes the future and acts before it occurs. To do this successfully, one must get the facts. Second, one must form a judgment as to what the facts portend. Third, one must act before it is too late.
On tips: The longer I operated on Wall Street the more distrustful I became of tips.
On inside information: It is not simply that inside information is manufactured to mislead the gullible. Even when insiders know what their companies are doing, they are likely to make serious blunders.
On fear and greed: Have you ever noticed how animals behave when no danger threatens? They lick their coats, preen themselves, strut and sing. So with human beings. And like animals, when fear strikes their hearts, they forget their elegances and sometimes even the common courtesies.
When we fail: When misfortune overtakes us, all of us are prone to blame someone else. This instinct for the preservation of self-esteem is one of the deep-seated traits of human nature.
On information overload: If anything, too much information is available today (1957). The problem has become (how) to separate the irrelevant detail from essential facts and to determine what those facts mean. More than ever what is needed is sound judgment. Like all good books on investing it’s less about what to buy than how to think. There’s no shortage of people offering advice on the former. It’s the latter that’s usually much harder to find.
No comments:
Post a Comment