I have been at this game for a very long time. I made my first investment in the stock market in 1961 and I have never been out of the market since then, not even for a single day.
I don’t believe in sure things. What I do believe in is risk-reward ratios and that is the concept that I build my life around. I think that believing in certainty in the world of investing is an exercise in delusional thinking that will destroy you. The higher the tolerance for uncertainty, the greater the rewards.
At this point the “I refuse to lose my money crowd” will proudly point to the fact that they have never lost a dime in their investing because they only invest in sure things like government guaranteed savings accounts or treasury bonds.
I go nuts. The first thing I do when I hear this argument is to frantically search for a chair so that I can break it over their idiot skulls. How can anybody be stupid enough to believe that any government guaranteed investment earns you a positive rate of return after inflation is beyond me? At this point dufus proudly points to the official government statistics that prove that the rate of return on government treasuries is above the rate of inflation. The stupidity takes my breathe away.
There is however, one exception to this rule. From time to time governments will embark on a kill inflation now crusade. During these short crusades, it is indeed possible for the true rate of interest to exceed the rate of inflation.
Except for these short term crusades I do not know of a single nation on the face of the earth whose bonds will pay you a positive rate of return after inflation if accurate numbers are used. I regard government bonds as guaranteed certificates of confiscation. The longer the term of the bond the more certain the confiscation.
For the sake of argument, let us suppose that we have discovered that the ten-year bonds of Outer Mongolia will pay you a positive rate of return after inflation using true numbers. I am talking miracles here. When the bonds mature in ten years, you do indeed have a positive rate of return. Or do you? There is the little matter of converting the Mongolian currency into dollars. You have a positive rate of return only if the Mongolian currency is convertible into dollars at a rate that is equal to or higher than it was at the time you purchased the bonds. In other words you could not only have a loss but you could have a very large loss on what you presumed to be a guaranteed return and this problem exists with every currency on earth.
The point that I am trying to make is that your investment in Mongolian bonds is certain only if you know with certainty what the exchange rate is going to be ten years into the future.
Recently a 21-year-old kid questioned me about my investing. He wanted me to recommend an investment that he could not lose money on. When I told him that I have never in a lifetime of searching found such an investment a look of total scorn appeared on his face. He told me that only stupid people invest in things that they can lose money on. Smart people only invest in sure things. When I asked him what he regarded as a sure thing, he said a savings account and then real estate.
This belief in sure things is not rare; it is as common as dirt. Nothing is more common than the belief in a sure thing. People spend their whole lives looking for it and when they think they have found it, they bet the ranch. All too often, their sure thing turns out to be a mirage and they lose everything.
I am a great admirer of Warren Buffet who is beyond dispute one of the greatest investors of all time. Recently however, he said something that was so stupid that it blew my mind. He said that the first rule of investing was not to lose money. The only trouble with this is that to follow that rule we would all have to be psychic and be able to predict the future. Since the only true psychics are safely tucked away in mental institutions, which is where they belong. It therefore follows that we cannot invest in anything because we cannot be assured in advance that we will not lose money.
If you look at the cover my book, you will see a green felt table with dice on it. It is a true depiction of how I invest. In well over forty years as an investor, I have owned more than 750 positions and have been successful more than 60% of the time. Anyone who tells you that they are right more than 80% of the time in this business is a liar.
It is time to reveal the secrets. If there is a key to investment success it is above all else the willingness to lose and to put your money at risk. The willingness to take a loss overrides all other investment considerations in importance. Nothing else even comes close. It is hard to overestimate just how unwilling people are to even consider the possibility of taking a loss. Let alone taking a loss. There are vast numbers of people who doom themselves to a career of working at a fast food joint after they turn 65 because the miserable returns they have earned on their safe investments did not even keep them up with inflation. If we are being truthful these people actually lost money by investing in a sure thing but they would rather die than admit it. For reasons that I have never been able to understand these people are quite proud of the fact that they have never taken a risk. Having dispensed with these pathetic losers, we can now consider the next category of investors.
It is dogma today in the trend chasing community that dominates the stock market that all paper losses of more than 10% are real losses and that the only real investors are those investors who have the courage to accept this fact and act on it. In this community selling your losers and thus turning your paper losses into real losses is regarded as proof that you have what it takes to be a real investor.
I have spent more than four decades proving that these people are wrong. I have made a career out of turning paper losses into profits. It isn’t hard. The only thing you have to do is to hold on to your investment until it returns to the profit column. These geniuses will tell you that this can never happen because all stocks that fall more than 10% are destined to go to zero. Nothing can shake them from this belief. Including the fact that many of them have a list of stocks that they have sold at a loss that is longer than their arm. Stocks that would be in the profit column today. If they only had the courage of their convictions and held on to them.
John Wayne summed it up nicely:
I don’t believe in sure things. What I do believe in is risk-reward ratios and that is the concept that I build my life around. I think that believing in certainty in the world of investing is an exercise in delusional thinking that will destroy you. The higher the tolerance for uncertainty, the greater the rewards.
At this point the “I refuse to lose my money crowd” will proudly point to the fact that they have never lost a dime in their investing because they only invest in sure things like government guaranteed savings accounts or treasury bonds.
I go nuts. The first thing I do when I hear this argument is to frantically search for a chair so that I can break it over their idiot skulls. How can anybody be stupid enough to believe that any government guaranteed investment earns you a positive rate of return after inflation is beyond me? At this point dufus proudly points to the official government statistics that prove that the rate of return on government treasuries is above the rate of inflation. The stupidity takes my breathe away.
There is however, one exception to this rule. From time to time governments will embark on a kill inflation now crusade. During these short crusades, it is indeed possible for the true rate of interest to exceed the rate of inflation.
Except for these short term crusades I do not know of a single nation on the face of the earth whose bonds will pay you a positive rate of return after inflation if accurate numbers are used. I regard government bonds as guaranteed certificates of confiscation. The longer the term of the bond the more certain the confiscation.
For the sake of argument, let us suppose that we have discovered that the ten-year bonds of Outer Mongolia will pay you a positive rate of return after inflation using true numbers. I am talking miracles here. When the bonds mature in ten years, you do indeed have a positive rate of return. Or do you? There is the little matter of converting the Mongolian currency into dollars. You have a positive rate of return only if the Mongolian currency is convertible into dollars at a rate that is equal to or higher than it was at the time you purchased the bonds. In other words you could not only have a loss but you could have a very large loss on what you presumed to be a guaranteed return and this problem exists with every currency on earth.
The point that I am trying to make is that your investment in Mongolian bonds is certain only if you know with certainty what the exchange rate is going to be ten years into the future.
Recently a 21-year-old kid questioned me about my investing. He wanted me to recommend an investment that he could not lose money on. When I told him that I have never in a lifetime of searching found such an investment a look of total scorn appeared on his face. He told me that only stupid people invest in things that they can lose money on. Smart people only invest in sure things. When I asked him what he regarded as a sure thing, he said a savings account and then real estate.
This belief in sure things is not rare; it is as common as dirt. Nothing is more common than the belief in a sure thing. People spend their whole lives looking for it and when they think they have found it, they bet the ranch. All too often, their sure thing turns out to be a mirage and they lose everything.
I am a great admirer of Warren Buffet who is beyond dispute one of the greatest investors of all time. Recently however, he said something that was so stupid that it blew my mind. He said that the first rule of investing was not to lose money. The only trouble with this is that to follow that rule we would all have to be psychic and be able to predict the future. Since the only true psychics are safely tucked away in mental institutions, which is where they belong. It therefore follows that we cannot invest in anything because we cannot be assured in advance that we will not lose money.
If you look at the cover my book, you will see a green felt table with dice on it. It is a true depiction of how I invest. In well over forty years as an investor, I have owned more than 750 positions and have been successful more than 60% of the time. Anyone who tells you that they are right more than 80% of the time in this business is a liar.
It is time to reveal the secrets. If there is a key to investment success it is above all else the willingness to lose and to put your money at risk. The willingness to take a loss overrides all other investment considerations in importance. Nothing else even comes close. It is hard to overestimate just how unwilling people are to even consider the possibility of taking a loss. Let alone taking a loss. There are vast numbers of people who doom themselves to a career of working at a fast food joint after they turn 65 because the miserable returns they have earned on their safe investments did not even keep them up with inflation. If we are being truthful these people actually lost money by investing in a sure thing but they would rather die than admit it. For reasons that I have never been able to understand these people are quite proud of the fact that they have never taken a risk. Having dispensed with these pathetic losers, we can now consider the next category of investors.
Investors who are emotionally capable of accepting the fact that if they don’t want to be working at a fast food joint after they turn 65 then there is no choice but to invest in investments that have risk but earn you a real return. The crisis that will determine their success or failure as investors rests largely with how they react when they have a “paper loss.” It is impossible to overestimate the importance of paper losses in the career of investors. A paper loss is a loss that would occur on an investment if you sold it at today’s price.
It is dogma today in the trend chasing community that dominates the stock market that all paper losses of more than 10% are real losses and that the only real investors are those investors who have the courage to accept this fact and act on it. In this community selling your losers and thus turning your paper losses into real losses is regarded as proof that you have what it takes to be a real investor.
I have spent more than four decades proving that these people are wrong. I have made a career out of turning paper losses into profits. It isn’t hard. The only thing you have to do is to hold on to your investment until it returns to the profit column. These geniuses will tell you that this can never happen because all stocks that fall more than 10% are destined to go to zero. Nothing can shake them from this belief. Including the fact that many of them have a list of stocks that they have sold at a loss that is longer than their arm. Stocks that would be in the profit column today. If they only had the courage of their convictions and held on to them.
It gets far, far worse. My ultimate crime is that I routinely increase my position in stocks that I am holding at a loss. After all why shouldn’t I. I know what these stocks are worth. I have spent decades analyzing stocks. In other words, I make money by losing money. The biggest profits I make tend to be stocks that I have increased my position in after they went down. The trend chasers who dominate today’s markets are adamant in their belief that adding to a losing position is suicidal. Then again, if you mindlessly buy stocks about which you know nothing solely because they are going up. You face a crisis when they go down. Don’t you? This incidentally is the stock and trade of the trend chasing community. After all, they do not have an opinion that is worth a dam as to the true worth of the stocks that they are buying and selling.
John Wayne summed it up nicely:
“Life is tough but it is even tougher when you are stupid.”
Forty Years a Speculator
Fred Carach
Oakland Park, FL 33309
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7 comments:
Hello Fred,
When Buffett said about not losing money he refered not to the paper losses but to a permanent loss of capital. The concept is better explained here: http://classicvalueinvestors.com/i/2010/11/warren-buffetts-rules-can-be-confusing/
Have a nice day!
People who tell me that bonds are less risk than stocks blow my mind. A dollar invested on July 11th 1976 in the S&P 500 is worth 13.14 today. A dollar invested in 6% bonds is worth 7.69. It seems to me that one guy is barely half as rich as the other- opportunity cost makes bonds very very expensive.
In Spain we've got a investment toy where you can either make money or get even, but never lose: 12€ @ 925 silver coins weighing 18g (16.65g in raw silver weight).
The recent silver bull run has caused silver price to get above the coins' face value, those coins are now a free money ride.
The cheapies are however hard to get now unless you're lucky to get some units at a bank. Bargain hunters who treasure 'em are jokingly suggesting the economy is going the Mad Max route so they better be caught holding the silver. :D
I will take a look at it
You are right of course. Bonds at this time are a very dangerous investment.
Silver is an excellent investment. I have been collecting silver dollars since the70s
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