Adapt what is useful, reject what is useless and add your own
• How to thrive in a Wolf of Wall Street world, where it’s all about lining the advisers’ pockets
Let’s face it, when it comes to investing everyone’s in it for themselves. If those who make a living selling, mentoring, coaching, writing and such tell you your stock is going up (or down) in price, you have absolutely no reason to believe them. Which is the reason why you should not follow advice.
The scene in the movie The Wolf of Wall Street where Mark Hanna tells Jordan Belfort over lunch that his only objective should be to move money from his clients’ pocket into his own, says it all.
“Sure,” replies Belfort. “But if you can make the clients money at the same time, it’s advantageous to everyone, right?” “No,” answers Hanna. “The number one rule of Wall Street: nobody, I don’t care if you’re Warren Buffett or if you’re Jimmy Buffett, nobody knows if a stock is gonna go up, down, sideways or in f**king circles, least of all stock brokers, right? It’s all a fugazi. Do you know what fugazi is? It’s a wazi, it’s a woozi. It’s fairy dust. It doesn’t exist, it’s never landed, it’s no matter, it’s not f**king real. Alright? We don’t create s**t, we don’t build anything.
“So if you’ve got a client who bought stock at eight, and it now sits at 16, and he’s all happy and he wants to liquidate and take his money and run home. You don’t let him do that … ‘cause that would make it real.
“So, what do you do? You get another brilliant idea, a special idea. Another situation, another stock to reinvest his earnings and then some. And he will, every single time … ‘cause they’re f**king addicted.
“And then you just keep doing this, again, and again, and again. Meanwhile, he thinks he’s getting s**t rich, which he is, on paper. But you and me, the brokers … we’re taking home cold hard cash via commission.”
If that just sounds like something a script writer came up with, it’s worth remembering the claim Morgan Housel made in the Motley Fool in 2014: while US corporations on a single day that year earned $4.62bn in net income, financial advisers, analysts and brokers, collected $630m in fees. “Strangely enough,” said Housel, “no media outlet reported these figures, despite being the two most important numbers necessary to understanding investing.”
But Buffett’s partner, Charlie Munger, said: “I believe in the discipline of mastering the best that other people have figured out. I don’t believe in just sitting down and trying to dream it all up myself. Nobody’s that smart.”
Which is why, maybe … you should follow advice. As James Basford says, no man is so wise that he can afford to wholly ignore the advice of others.
“I don’t think I have any original ideas,” admits Buffett. “I talk about reading Graham. I’ve read Phil Fisher. So I’ve gotten a lot of ideas from reading. You can learn a lot from other people. In fact, I think if you learn basically from other people, you don’t have to get too many new ideas on your own. You can just apply the best of what you see.”
“I used to think that having my own unique opinions about every single thing was the way to go,” says Ben Carlson at A Wealth of Common Sense. “Why be a conformist? Slowly but surely I learned it’s a waste of time to constantly try to create your own ideas just for the sake of being different. It’s an uphill battle against people that are much smarter than you are. Most of us will get much more out of destroying our own wrong ideas than coming up with new ones every day.”
So, what’s it to be? Truth is there’s good advice, bad advice and the sort of advice (by far the most common) that might turn out to be good but could just as easily turn out to be bad, depending on circumstances.
“The best advice is timeless because it focuses on understanding and perspective over action and tactics,” says Carlson.
Presumably he’s referring to the sort of advice we got from Benjamin Graham when he said to look for a margin of safety; Peter Lynch when he says buy what you like; George Soros when he says it’s not whether you’re right or wrong but how much money you make when you’re right that counts. Advice that rings true, resonates, and yet isn’t really all that useful.
To cite Marcus Padley, the closest those who rely on a few Buffett quotes are likely to come to the “Warren Buffett Way” is wearing a cardigan and living in the same house for the rest of their life. Who’s to say what you like is what everyone else likes? And while how much money you make when you’re right is important, it isn’t nearly as important as how much you lose when you’re wrong.
That said, there are costly lessons to be learnt in the market that others have already paid for and you shouldn’t ignore. The trick is to adapt what is useful, reject what is useless, and add what is your own.
Contrary to Carlson’s suggestion, you might also be better off focusing on actions and tactics rather than perspective by adopting what works or has worked in the past. Michael Covel’s advice, for example, to follow trends. Kanwal Sarai’s advice to focus on dividends. Mohnish Pabrai’s advice to just follow Buffett’s trades.
“There was a study done a few years back,” explains Pabrai, “where some university professor had documented returns one would have made following what Buffett did — buying and selling right after his trades became public knowledge. One would have trounced the S&P 500 just doing that.…
“Take the example of Petrochina. The stock went up some 8% after Buffett’s stake was disclosed. One could have easily bought boat loads of Petrochina stock at that 8% premium. Since then … [it] has been up eight-fold — excluding some very significant dividends. The entire planet could have done that trade yet very few did.”
Which is just as well, given how some who did follow Buffett got burnt when he suddenly announced he’d sold his stake because of the price hike. Nothing’s that easy in the markets. Which is why, when it comes to taking advice, there’s so little we can steadfastly rely on.
This isn’t altogether bad if you can share in Edna St. Vincent Millay’s sentiment when she said, “I am glad that I paid so little attention to good advice; had I abided by it I might have been saved from some of my most valuable mistakes.”
THAT SAID, THERE ARE COSTLY LESSONS … THAT OTHERS HAVE ALREADY PAID FOR, AND [WHICH] YOU SHOULDN’T IGNORE.