Five Market Adages That Can Help Your Portfolio

There are stock quotes and then there are quotes about stocks. Or, to be a bit more precise in the latter case, there are quotes about the world of investing. These sayings have accumulated over the years, and while some are devoid of much insight, others offer real pearls of wisdom for investors.

A quote by itself won’t make you money, but taking the lesson to heart can serve you well when it comes to managing your investments. With that said, here are five well-known market adages investors should know.

The Four Most Dangerous Words In Investing Are "This Time it’s Different"

This observation, made by legendary investor Sir John Templeton, teaches us to be wary of claims that a particular stock or asset class has miraculously entered a “new era” where the old rules of valuation don’t apply. “This time it’s different” tends to be uttered when prices have become detached from reality. Market players come up with all sorts of rationalizations to justify why a bubble is, in fact, not a bubble at all. This saying, or a close variation (e.g. “We’re seeing a paradigm shift”) was heard during the 1990s internet stock bubble and the 2008 commodity bubble, to pick two noteworthy instances. If you see an asset described in these terms, odds are that its bull run is late in the game.

Markets Can Stay Irrational Longer Than You Can Remain Solvent

The first quote is essentially a warning about markets that are unsustainably pricey. By contrast, this saying by John Maynard Keynes reminds investors that prices and reality can take a long time to converge. More to the point, Keynes’ words caution people about assuming that market rationality will return in short order. Why this quote matters: anyone considering betting against what they see as a bubble, or borrowing to buy a seemingly undervalued asset should recognize that if their timing is off, it can wreak havoc on a portfolio. Going back to the internet bubble, there were well-known money managers who correctly saw that tech stocks would crash, but were too early in placing their bearish bets and suffered huge losses as a result.

There’s Never Just One Cockroach In The Kitchen

Hopefully you don’t have any cockroaches in your kitchen. Unfortunately, however, if you’ve seen one, chances are there are others. The same is true for companies on the stock market. This adage, which has been repeated by, among others, Warren Buffet and newsletter writer Dennis Gartman, implores investors not to ignore the early signs of trouble in an investment. Maybe a Chief Financial Officer unexpectedly resigns without much explanation. Or perhaps a company reports that they are under investigation for fraud. Never may be a strong word, but odds are very good that this kind of bad news is not isolated. In fact, it may be the sign of even worse news to come.

Don’t Catch A Falling Knife

If an asset is crashing, it can be tempting for an investor to buy, believing they are smart enough to call the exact bottom. This saying, with its gory visual, warns investors about the risks of bravery during a price collapse. We saw a good example of this when oil started to plummet in late 2014 — as the price kept falling, pundits fell over themselves trying to pinpoint the exact low. Oil did finally recover, but it did so only after reaching levels few expected.

Investing Should Be More Like Watching Paint Dry Or Watching Grass Grow. If You Want Excitement, Take $800 And Go To Las Vegas.

For the majority of individual investors, I think this may be the most important quote of the five. Attributed to economist Paul Samuelson and cited by the website Investopedia, it’s a great reminder that long-term investing may not be exciting but it works. It means, for most people, having a diversified portfolio that is re-balanced as appropriate every now and then and not trying to predict short-term market movements. Over the years, your portfolio should grow and experience the benefits of compounded gains.

Interestingly, even those these are pretty well-known adages, many professional market players ignore them time and again. Analysts who know better than to say “This time it’s different” still say it and traders who know not to catch a falling knife still stick out their hand. What’s important, rather than just knowing a quote, is to really internalize it, so you’re inoculated from certain harmful investment tendencies. These lessons won’t make you rich, but they can stop you from making poor decisions with your money.

Andrew Hepburn is a freelance writer based in Toronto. He specializes in economic and financial issues. From 2006 to 2009 Andrew was a Research Associate with Sprott Asset Management in Toronto focusing on commodity markets. He is a graduate of Queen's University. ahepburn20@hotmail.com