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Is there any such thing as easy money in stock market investing?

25th June, 2020

Published in the Sunday Times on June 28th 2020

I sometimes reflect on what I refer to as my CoWS portfolio; My could o’, would o’, should o’ investments that I never executed on, that subsequently soared in value. Such hindsight analysis is of course completely pointless. And I do try to balance it with recall of the landmines I’ve managed to avoid; selling Anglo Irish Bank to buy an engagement ring in 2001 looked horrible for a long time before turning out to be my trade of the decade.

The case of Ronald Wayne

As bad as some of my non-decisions have been, it’s always therapeutic to think of others less fortunate. So spare a thought for Ronald Wayne. In 1976, he was working at three-year-old Atari, where he met Steve Jobs and Steve Wozniak.

According to his Wikipedia page, to help settle one of their typical intense discussions about the design of computers and the future of the industry, Wayne invited the two to his home to facilitate and advise them. In the ensuing two-hour conversation about technology and business, Jobs proposed the founding of a computer company led by him and Wozniak. Those two would each hold a 45% stake so that Wayne could receive a 10% stake to act as a tie-breaker in their decisions. The three founded Apple Computer on April 1, 1976.

Wayne quit the company, reportedly less than a fortnight later, exchanging his equity for US$800 on April 12, 1976.

A 10% stake in Apple today would be worth $146bn. I’ve no idea whether this sorry tale haunted Wayne. Even if he had held on, it’s highly unlikely he’d have maintained his entire shareholding. But even the most stoic would have to reflect and imagine what might have been.

Easy Money?

I was reminded of this recently by a financial adviser who was reflecting on the returns of his clients’ portfolios over the last year. Having entered 2020 on a very cautious footing, he was looking to add risk to portfolios. Such was the pace of the Covid-related sell off and subsequent recovery, that he missed the opportunity to buy at March lows. As he ruminated about the foregone opportunity, he reflected on how the easy money had now been made.

I don’t think there is ever any easy money made. This is hindsight playing tricks.

Studies of hindsight bias have been carried out in many spheres of activity – including investing - and all find the same thing. When it comes to analysing past decisions we can’t shake off the prism of what has already happened.

I look back at Warren Buffett’s avoidance of the tech-wreck in 2001/2 or his 2008 investments in several banks. Part of me thinks it’s genius. Another part of me thinks that the value on offer was obvious.

I have to remind myself that Buffett’s bank investments were made the same week that ex-PIMCO CEO Mohamed El-Erian told his wife to take out as much cash from the ATM as she could because there was a high chance banks would collapse. Buy when there’s blood in the streets we’re told. Don’t kid yourself into thinking it’s easy.

Little point asking what might have been if you acted differently

Most of what we read about the past was written after the event. It’s very rare that we can get contemporaneous reports of what people actually felt. In The Black Swan, Nassim Taleb recommends William Shirer’s Berlin Diary because he published his daily accounts verbatim, untainted by knowledge of the events that followed. Shirer’s on-the-spot diary of events leading up to the Second World War shows how little understanding there was ahead of time of the effect of the forthcoming events.

When making an investment decision, we should record our thought processes at the time. If we continually revisit our investment decisions and force ourselves to face the information we had at the time of the decision, rather than the information we have now, we can begin to understand the issues at hand.

Risk is required for reward, but it’s a nebulous concept, despite the financial services industry’s desire for quantifying it in a neat little number. Risk is measured by the acceptance of doubt, not by a number which increases as prices decline.

Positive investment outcomes live in the ability to be comfortable being uncomfortable. History unfortunately cannot teach us much about this, as past sell offs look a lot like opportunities, as the aforementioned adviser’s reaction attests. But future sell offs won’t appear as obvious when they arrive. Doubt is necessary. But so is conviction.

Coronavirus related turmoil may in time be looked back upon as an obvious opportunity

The coronavirus related turmoil on stock markets in February and March was exceptionally unnerving. The worst of this may not yet be behind us, but in hindsight it’s quite likely we'll eventually look back at this period and assess the peak to trough losses, as being an obvious buying opportunity. A contemporaneous account would beg to differ – I have the notes to prove it.

Don’t let hindsight fool you into thinking that prior gains were easy. It is never the case. If you are considering making an investment decision currently, make a note of your thought process. It won’t guarantee you are making the right decision. But you won’t be able to fool yourself into thinking it was obvious, whatever the outcome. 

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