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Stock Market Mistakes; Warren Buffet on speculation, irrational investing and ignoring fundamentals.





2020 June - Global Stock markets are facing a surge of millions of inexperienced investors participating for the first time, looking to make a "Quick profit" upon the previous months rollercoaster decline and recovery due to COVID-19.


New low cost trading apps & so called "money guru's" on social media making it look like a fun game. Showing large capital profits and insta marketing every get rich quick scheme from "Mastering Forex' to "I'll teach you to make six figures day trading". CUE EYE ROLL... The market is continuously flooded with people who won't stay the course long term - which is where real wealth creation begins.



Combined with the rising cost of entry into property investments in capital cities and the pathetically low interest rates on savings accounts and term deposits. The market is being flooded with new hopeful entrants.


The problem with dabbling with things you don't fully understand, is it usually doesn't turn out well.


Trying to make a quick profit can be fine if relative to your financial situation and understanding of complex markets and investment strategies.


However, statistics show long term investment yields far better results. In my opinion you should only invest money you are happy to part with for ten years or more...


"The Stockmarket is a device that transfers wealth from the impatient to the patient."


"From the inexperienced to the experienced."


I love this quote and believe wholeheartedly in patience and good practice -I even made this cute poster using the quote! I may just print it for the office hmm....


Since the low of the 23 March 2020 stock market "Bloodbath, amidst the global COVID-19 pandemic many have made a lot of money and made it look easy. (I too have made significant profits from carefully planned strategies and leveraging cash holdings into trusted companies timed to take advantage of such shock events) But for new Investors or those trigger happy Stockmarket Cowboys, things can turn from good to bad just as rapidly. A warning for those riding out the stock market wave with little fundamental knowledge of what they are actually investing in among the aftershock.


You may be more inclined to take advice from one of the worlds wealthiest investors - WARREN BUFFET.


Let's take a look at what Warren Buffett said in his annual letter to the Berkshire Hathaway shareholders in 2000 near the height of what became the 'tech wreck'.


It was another time of massive speculation ignoring company fundamentals.


This extract comes from his collection of letters.


Warren Buffet -year 2000

Now, speculation - in which the focus is not on what an asset will produce but rather on what the next fellow will pay for it - is neither illegal, immoral nor un-American.


But it is not a game in which Charlie and I wish to play.


We bring nothing to the party, so why should we expect to take anything home?


The line separating investment and speculation, which is never bright and clear, becomes blurred still further when most market participants have recently enjoyed triumphs.


Nothing sedates rationality like large doses of effortless money.


After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball.


They know that overstaying the festivities - that is, continuing to speculate in companies that have gigantic valuations relative to the cash they are likely to generate in the future - will eventually bring on pumpkins and mice.


But they nevertheless hate to miss a single minute of what is one helluva party. Therefore, the giddy participants all plan to leave just seconds before midnight.


There’s a problem, though: They are dancing in a room in which the clocks have no hands.


Last year, we commented on the exuberance - and, yes, it was irrational - that prevailed, noting that investor expectations had grown to be several multiples of probable returns.


One piece of evidence came from a Paine Webber-Gallup survey of investors conducted in December 1999, in which the participants were asked their opinion about the annual returns investors could expect to realise over the decade ahead.


Their answers averaged 19%. That, for sure, was an irrational expectation: For American business as a whole, there couldn’t possibly be enough birds in the 2009 bush to deliver such a return.


Far more irrational still were the huge valuations that market participants were then putting on businesses almost certain to end up being of modest or no value.


Yet investors, mesmerised by soaring stock prices and ignoring all else, piled into these enterprises.


It was as if some virus, racing wildly among investment professionals as well as amateurs, induced hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them.


This surreal scene was accompanied by much loose talk about 'value creation'. We readily acknowledge that there has been a huge amount of true value created in the past decade by new or young businesses, and that there is much more to come. But value is destroyed, not created, by any business that loses money over its lifetime, no matter how high its interim valuation may get.


What actually occurs in these cases is wealth transfer, often on a massive scale. By shamelessly merchandising birdless bushes, promoters have in recent years moved billions of dollars from the pockets of the public to their own purses (and to those of their friends and associates).


The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them.


Too often, an IPO, not profits, was the primary goal of a company’s promoters. At bottom, the 'business model' for these companies has been the old-fashioned chain letter, for which many fee-hungry investment bankers acted as eager postmen.


But a pin lies in wait for every bubble.


And when the two eventually meet, a new wave of investors learns some very old lessons:


First, many in Wall Street - a community in which quality control is not prized - will sell investors anything they will buy.


Second, speculation is most dangerous when it looks easiest.



.......


Wow!... There is a huge amount of wisdom to be taken from this letter, perhaps the most important line being 'a pin lies in wait for every bubble.'


So what does that mean for you?


Hopefully, you are not one of the "new wave of investors" that is going to 'learn some very old lessons' the hard way.


Buffet covers some of the things to avoid in this very article-


Fee-hungry investment bankers (HIGH FEE MANAGED FUNDS suck the profits from your accounts to their mangers pockets).


Buying stocks without fundamental knowledge of the company and its assets (and yes tricky marketing is also used for funds and equities) 'Wall Street - a community in which quality control is not prized - will sell investors anything they will buy'... classic case of buyer beware...


Price vs Value Traps -"hallucinations in which the values of stocks in certain sectors became decoupled from the values of the businesses that underlay them." meaning stocks that are overvalued but the price continues to rise above the underlying assets (the companies real numbers)


Speculation dangers .. If its too good to be true- it usually is.... "speculation is most dangerous when it looks easiest." Buffet also famously said; "Be fearful when other are greedy"


Irrational expectations.. I think that one speaks for itself.. Be conservative and run your numbers conservatively or lower! To get a clearer more realistic model of your financial future.


Amongst the noise, media drama and hysteria remain calm, focused and confident in your OWN plan and budget and stay cool, calm and collected.


Intelligent investors follow a plan and most importantly Stick to it. This is your plan- not your neighbours! Keep your eye on YOUR own finances and don't follow the crowd!


Know your individual investment risk, overall risk tolerance and portfolio risk profile for best practice investing. Don't over stretch and always have a solid emergency fund and cash holdings. There is no point investing in an asset you may have to sell (and then triggering a potential capital gain event ) if you get in financial trouble.


If you are new to investing I created an easy to follow infographic 6 simple steps to SAFELY INVEST you can acsess HERE.


I also wrote an article about the four pillars of successful investing that is a great read for new investors and market entrants. You can find the article HERE


Let me know your thoughts by reaching out on socials or leaving a comment below...


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