What to Pick and When to Get In
Pistone tells a story that was told to him by thieves from a Brooklyn crew he was running with at the time. Friends in Florida had given them a tip: in a mansion in Fort Lauderdale lived an elderly lady with a safe full of cash and diamonds, about a quarter of a million. The four of them flew down to do the job. They bought tools for cracking the safe. They got into the house by flashing fake police badges.
There was no safe in the house. No money either. All they found were bullet holes in the ceiling, a little cash and bank papers for a safe-deposit box opened the day before. After subtracting the plane tickets, the tools and the other expenses, Pistone writes, each of them made six hundred dollars.
Then the details came out. The lady’s husband had died not long before and left her a quarter of a million, having promised part of it to his nephew. The widow didn’t like the nephew and didn’t want to give him anything. The nephew came round, quarrelled with her and fired a shot into the ceiling. Next morning the widow took the lot to the bank. The tip, Pistone sums up drily, was good but late.
And one of the thieves, Guido, said something I consider the best formula in all of financial wisdom about timing. It went something like this: if anyone had told us about that beforehand, we’d have stayed home.
The Right Idea, Too Late
That’s the main trouble with time. Knowing what to do isn’t enough. You need to know when. And by the time you find out it’s time, it’s usually too late: the people who found out earlier have already bought, the price has already gone up, the money is already in the bank.
On the financial markets anyone who has tried buying on the newspaper headlines knows this. Good news about a company is published—the price has already gone up. A good fund with a fine three-year return makes it into the rankings—everyone has already piled in, and for the next three years it will most likely be ordinary. The tip is good but late.
And the most dangerous part is what Guido put into words without meaning to. After it’s all happened, it seems you could have known in advance. In hindsight everything is obvious: that the widow would take the money to the bank, that the market would crash in 2008, that this particular share would go up tenfold. Psychologists call this hindsight bias. What makes it dangerous is that it teaches the wrong lesson: that next time we’re sure to guess right. We won’t.
The Haystack Versus the Needle
The second question is what to pick. Find that one share, that one manager who’ll beat the market? Or buy the whole market?
In December 2007 Warren Buffett made a million-dollar bet with a New York investment firm. He maintained that over ten years a simple fund that buys all the shares of the biggest American companies in the S&P 500 index and charges a minimal fee would beat a set of funds chosen by professionals. The firm picked five funds, each of which invested in dozens of hedge funds run by the best managers.
Ten years later the index fund was up one hundred and twenty-five per cent, roughly eight and a half per cent a year. The best of the professionals’ five funds was up eighty-seven per cent. The worst, less than three. Buffett won, and a girls’ charity in Omaha received more than two million two hundred thousand dollars.
The professionals weren’t stupider. They just charged a fee for their picking, and on average picked no better than the market. The fee ate the difference. One of the great investors we’ll talk about in the last chapter put it this way: don’t look for the needle in the haystack, just buy the haystack.
When to Get In
So when do you get in? The honest answer: almost nobody knows. But there are a few things I do know.
If you’ve already got a big sum in hand, there are two ways to go, and each has its price. Put it all in at once—in the past that more often brought in more. Researchers at Vanguard tested this on the history of several markets: a sum invested at once beat the same sum invested in instalments in roughly two cases out of three. That’s history, not a guarantee: the third case may well fall to you. The market goes up more often than it goes down, and money waiting its turn earns almost nothing. But if you went in at the peak, you’ll sit through the whole drop. Investing in instalments, over months, costs more on average. On the other hand, you’ll buy some dear and some cheap and won’t be kicking yourself for going in at the very top. Choose by what you can stand without selling everything in a panic. And what you put aside from every pay packet goes in by instalments anyway. Nothing to choose there.
Don’t get in because everyone’s getting in. If taxi drivers and barbers have started talking about some investment, then everyone who meant to buy has already bought. The only one left to buy is you.
And don’t get out out of fear. The market’s strongest days of growth usually come close to its most frightening days of decline. Whoever bolted in a panic usually misses the rebound too.
How the Don Bought Presses
Don Vincenzo never tried to guess when equipment would be cheaper. He had a rule: put a little aside for a new press every month, and buy when the old one starts breaking down more than once a month—not sooner and not later.
Once, mind you, he got lucky. A competitor on the next street went bust, and his equipment was auctioned off at a third of the price. I said, there you are, Don, you’ve finally caught the moment. The Don shook his head. “I didn’t catch the moment,” he said. “I was just ready when it came. I had the money because I’d been putting it aside. I had the space because I’d kept the yard. Guessing when someone will go bust is work for vultures, not for laundrymen.”
The Bottom Line
Few people time the market, and not for long. Everyone else had better decide in advance how to get in and what fall won’t make them get out—and stick to that decision when things get frightening.