Traders die broke. Cut your losses, and let your winners run. Trees dont grow to the sky. Bears get fat and bulls get fat, but hogs get slaughtered.
No matter what happens on Wall Street, there has always been a bull market in axioms of investing. For example, Peter Lynch says, Long shots are no shots to advise investors to beware of the downside. And Warren Buffett says, Every putt makes someone happy, to emphasize that for every buyer there is a seller.
And the supply of investment adages just keeps growing. There are a zillion of them, says Arthur Glick, a 19-year veteran broker with Prudential Securities in Buffalo, N.Y. His personal favorite, Time will make you a winner. He uses it to encourage jittery investors to be patient.
But why does Wall Street have such a way with words? The simple answer is that brokers are looking for a concise, high-impact method to impart investment information to clients. And, while its easy to dismiss maxims as simplifications, they do have a place in broker-investor communications. With a few caveats, such sayings should probably be part of every brokers repertoire.
Employing AxiomsOne of the most important uses of axioms is to translate unfamiliar concepts into ideas that anyone can understand.
The goal is to communicate information to the client, says Keith Wibel, president of Foothills Asset Management in Tempe, Ariz. Given that most of them dont speak the language of investments, the homilies and axioms can be very useful informational tools. For instance, he likes, You cant grow an oak tree by digging it up every week. Translation: Investors need to pick an investment philosophy and be consistent.
Simple sayings also help cut through the information overload plaguing everyone. People are looking for little pearls of wisdom to bring it all home, to make it real for them as individuals, says Kathleen Hayes, an 18-year veteran broker at Merrill Lynch in Lake Charles, La. One of Hayes favorites: You cant eat relative performance. That serves to remind clients that the performance of other peoples investments doesnt matter. All that is important is how they are doing.
Sometimes difficult investment strategies can be easier to sell when boiled down to a catchy phrase. For example, over the past year, value-oriented mutual funds have lagged growth funds. In response, Glick tells clients, Smart guys dont turn stupid overnight. That encourages clients to stick with managers who have been successful over longer periods.
Excellent AxiomsBrokers say the ideal investment axiom is memorable, brief and vivid. Fail to plan, plan to fail falls in that category. Hayes uses it and says shes confident clients will at least remember her advice to develop a strategy, even if they fail to follow it. She also says, Investigate before you invest, to remind clients not to buy on the basis of rumors.
Client recall increases if brokers use a highly visual adage. Wibels oak tree, and the ever-present bears, bulls and hogs, all bring to mind distinct pictures. When it paints a picture for you, it makes sense out of your experiences, Hayes says.
To be effective, even the best maxim has to be employed properly. Brokers say the main rule is that such sayings should never be used by themselves. Instead, they should serve as introductions to more complex explanations of the topic.
I say it once to clients to give them the mental image, Wibel says. Then I will describe to them how that little homily translates to managing their investment portfolio.
Another rule is to monitor the clients reaction to a saying. If theres any confusion or misunderstanding about the broad-brush description, step in quickly to clear it up with details. Youve got to be careful with everything you say, all the time, Glick says.The Perils of Proverbs
Axioms have to be handled with care. Because they are brief, they necessarily simplify complex issues--sometimes too much. Some of them are just glib, Hayes says. Buy low, sell high, for instance, is easier said than done. And it assumes market timing works, which it doesnt.
That brings up a good point. Many of these sayings have been around for centuries, such as Benjamin Franklins A penny saved is a penny earned. Across the years, such sayings may have taken on a number of different meanings.
An equal risk is that axioms may have little or no meaning at all. I dont think these hackneyed terms hit home, says Dave Almquist, a broker with A.G. Edwards in Dana Point, Calif. We make the mistake in our industry of using the same terms over and over again.
Almquist, who avoids axioms, says that a broker runs the risk of boring himself if he relies on a threadbare saying. Its not said with conviction any more, and it gets old, he says. After a while, you just tune it out.
Brokers might prefer that some axioms be tuned out for good. Hayes, for instance, objects to any reference to playing a hunch or playing the market. Thats the wrong approach, she says. If this is your life savings, playing with it is inappropriate.
Summing Up SayingsAs common as they are, axioms dont seem to get much organized attention from brokers. For instance, reps should probably be listening as closely to the adages they hear from clients and colleagues as to their own. Its important for people you work with to share the same philosophies, Hayes says. So talking about some of your favorite sayings might be a way to interview somebody.
Its true that an axiom can be a double-edged sword, either cutting through confusion or injuring a persons understanding. So to make such sayings work for you, choose your maxim carefully, pay attention to the way it is received, and always follow up with details.
You have to be careful you communicate the concept accurately, Wibel says. You dont want to make it sound so simple that there is no risk in the investment.
From: Arthur Zeikel (Father)
To: Jill Anne Zeikel (Daughter)
Date: Oct. 17, 1994
Re: Managing Your Own Portfolio
Personal portfolio management is not a competitive sport. Instead, its an important individualized effort to achieve some predetermined financial goal balancing ones risk-tolerance level with the desire to enhance capital wealth. Good investment management practices are complex and time-consuming, requiring discipline, patience and consistency of application. Too many investors fail to follow some time-tested tenets that improve the odds of achieving success, while reducing the anxiety naturally associated with an uncertain undertaking.
Hopefully, the following will help.
* A fool and his money are soon parted.
Investment capital becomes a perishable commodity if not handled properly. Be serious. Pay attention to your financial affairs. Take an active, intensive interest. If you dont, why should anyone else?
* There is no free lunch.
Risk and return are interrelated. Set reasonable objectives using history as a guide. All returns relate to inflation. Better to be safe than sorry. Never up, never in. Most investors underestimate the stress of a high-risk portfolio on the way down.
* Dont put all your eggs in one basket.
Diversify. Asset allocation determines the rate of return. Stocks beat bonds over time.
* Never overreach for yield.
Remember, leverage works both ways. More money has been lost searching for yield than at the point of a gun.
* Spend interest, never principal.
If at all possible, take out less than comes in. Then, a portfolio grows in value and lasts forever. The other way around, it can be diminished quite rapidly.
* You cannot eat relative performance.
Measure results on a total return, portfolio basis, against your own objectives, not someone elses.
* Dont be afraid to take a loss.
Mistakes are part of the game. The cost price of a security is a matter of historical insignificance, of interest only to the IRS.
Averaging down, which is different from dollar cost averaging, means the first decision was a mistake. Its a technique used to avoid admitting a mistake or to recover a loss against the odds.
When in doubt, get out. The first loss is not only the best, but usually the smallest.
* Watch out for fads.
Hula hoops and bowling alleys didnt last. There is no permanent shortage or oversupply. Every trend creates its own countervailing force. Expect the unexpected.
Make decisions. No amount of information can remove all uncertainty. Have confidence in your moves. Better to be approximately right than precisely wrong.
* Take the long view.
Dont panic under short-term transitory developments. Stick to your plan. Prevent emotion from overtaking reason. Market timing generally doesnt work. Recognize the rhythm of events.
* Remember the value of common sense.
There is no system that works all of the time. History is a guide, not a template.
This is all you really need to know.