Investment Strategy

“Nine times out of ten I lose money.”

This past week I’ve been back in my home country of England for a family wedding in Mayfair, London. A couple of conversations I had highlighted some of the risky things that many private investors do. Unfortunately, they are usually the route to the poor house.

The wedding was held in one of those fancy private clubs in a leafy square in London’s wealthiest district. It’s the sort of place where you can’t walk 20 metres without tripping over a Ferrari or Rolls Royce.

The whole area used to be dominated by this kind of exclusive establishment. Nowadays they cling on in the face on an onslaught of hedge funds. Those are the usually complex, and almost always overpriced, specialist investment funds designed to reward their managers much more than their investors.

These old style clubs are the sorts of places run using strict and endless rules. A jacket and tie must be worn by all “gentlemen” at all times. Our little family group managed to break three rules within 20 minutes of arriving (no photos in the lobby, no phones, no carrying bags around in public spaces). Since I was staying the night in a room at the club I thought it best to ask my hosts if there was a dress code in bed. Fortunately no such requirement existed.

After the formalities of the wedding ceremony, a drinks reception, speeches and lunch I was catching up with another guest who I hadn’t seen for 15 years or more. We’ll call him “Jim”.

Jim is a professional currency trader at one of the very largest American investment banks, based in the City of London or “square mile”, as the financial district is called. He’s been trading for three decades, which makes him a rare survivor in a brutal industry.

…back in the early 1980s, currency trading involved aggressive and hard drinking young men shouting loudly at each other down phone lines.

When Jim started out, back in the early 1980s, currency trading involved aggressive and hard drinking young men shouting loudly at each other down phone lines. Nowadays, as Jim told me, “90% of my volume is done electronically”. (I assumed he meant his volume of business transacted, and not his volume of alcohol ingested.)

In others words, most of those young men have been replaced by powerful computers. The raucous shouting and swearing has given way to the gentle tap-tapping of keyboards. When orders are placed by customers most of them are “settled” without any human intervention at the bank. It’s almost all automated. Jim must be extremely good at what he does, and at adapting to change, to still have a job in what is essentially a technology business.

So there we were having a drink and a chat. An ex-banker and a current broker talking shop and catching up.

“I don’t believe in trading.” I said. “I’d rather buy something cheap and hold it for years.”

“You’re so right.” said Jim. “Whenever I do trades for my own account, you know…putting on a spread bet in the markets…I’ll take a look at how it’s working as the day goes on…sometimes it works…but nine times out of ten I lose money.”

He said the worst performing accounts he looked after were almost always professional traders like you. The clients were too aggressive and over confident and usually lost money…

“It’s interesting you say that. Years ago I was talking with a senior Swiss private banker. He said the worst performing accounts he looked after were almost always professional traders like you. The clients were too aggressive and over confident and usually lost money…Anyway, where are you living these days….”

The conversation tailed off into lighter territory, and eventually a group of us headed off into the London night for cocktails and dancing at a jazz bar. But the conversation stuck in my head.

Remember, Jim is a professional trader, working at one of the world’s biggest investment banks. He lives and breathes markets. And he’s been doing it for three decades, which is rare in that business.

Yet he agreed with me that trading short term with your own money is a waste of time. Worse than that, he admitted that he lost money on most of his trades. This is why I encourage you, fellow OfWealthers, to take a longer term view. You do this by buying attractive assets when they’re available at low prices, and then holding on. (Find out more about the power of long term compounding in the Free Wealth Workout Report)

A couple of days later I was at a drinks party with some of my parents’ friends, all retirees. The sun was shining so we mingled in our hosts’ beautiful English garden, overlooked by the spire of the village church.

A lady found out my line of work and told me she’d been given a stock tip. She wanted to know what I thought, which is an occupational hazard in this line of business. She told me her son had put substantial money into the shares of a copper mining business in Peru. He was encouraging his parents to do the same. Suddenly a string of red warning flags were raised inside my head.

Copper = volatile industrial commodity = red flag

Mining = mostly badly run industry = red flag

Peru = frontier market in Latin America = red flag

This is not to say that the stock in question isn’t a great opportunity. It could well be.

It’s just that if you’re going to invest in this type of single stock of a company operating in a high risk business then you’d better be an expert. Getting it right requires a high degree of training and years (preferably decades) of expertise. Or you need to employ someone with the necessary expertise, that you also trust, to help you decide if it’s a good idea or not.

Perhaps the lady’s son was an investment and commodities expert who lived in Peru? No such luck. I was informed he was a school teacher in England.

“Weeeelllll….” I began cautiously, “obviously I haven’t studied the company in question. But you need to know that what you’re proposing is highly speculative. I wouldn’t really call it investing at all. It’s the sort of thing that will go to the moon and make you rich, or go to zero and wipe you out. There’s not much middle ground. So my suggestion, if you still want to go ahead, is only put in a very small amount of money. Then expect to lose it but be pleasantly surprised if you make a profit.”

“Oh, I see.” she said whilst elbowing her husband in the ribs to make sure he was paying attention, “Thank you so much. I’ll talk to my son again.”

“Isn’t it wonderful weather that we’re having…” The conversation drifted back into more trivial and less controversial matters.

Both of these conversations illustrate common mistakes that private investors make, whether they’re hardened professional traders or rural housewives of retirement age. People are prone to speculate in the hope of getting rich.

There’s nothing wrong with a bit of speculation. But it shouldn’t be confused with investment. Speculation is about gambling.

There’s nothing wrong with a bit of speculation. But it shouldn’t be confused with investment. Speculation is about gambling. It’s not far short of buying a lottery ticket in the hope of making a big score. But, just as with the lottery, for every winner in the speculation game there are hundreds, thousands or even millions of losers. If you speculate, the odds are you’ll be one of the losers most, if not all, of the time.

So you need to understand speculation for what it is. Something that will usually lose you money.

Investing is a totally different proposition. First and foremost it’s about not losing what you have. Second it’s about making money.

That’s not to say that a patient investor can’t make serious money, and even become rich. But it won’t happen quickly, and it almost never happens from short term trades or taking hot tips from inexpert family and friends (or the television).

Here at OfWealth we’re interested in the serious business of investing, although our aim is to make it easier to understand. If you want to get your speculative kicks then I suggest you go to the horse races. I enjoy it from time to time. But I don’t expect to make money that way.

 

Stay tuned OfWealthers,

Rob Marstrand

robmarstrand@ofwealth.com

 

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Rob is the founder of OfWealth, a service that aims to explain to private investors, in simple terms, how to maximise their investment success in world markets. Before that he spent 15 years working for investment bank UBS, the world’s largest wealth manager and stock trader with headquarters in Switzerland. During that time he was based in London, Zurich and Hong Kong and worked in many countries, especially throughout Asia. After that he was Chief Investment Strategist for the Bonner & Partners Family Office for four years, a project set up by Agora founder Bill Bonner that focuses on successful inter-generational wealth transfer and long term investment. Rob has lived in Buenos Aires, Argentina for the past eight years, which is the perfect place to learn about financial crises.