Sometimes I dig up old investing books to
avoid work pass the time. The latest was a copy of The Art of Investing by John Ferguson Hume. It has everything a 19th-century person needs to invest.
It works for 21st-century advice too.
Reading old books like this reaffirms two basic truths:
- Successful investing can be boiled down to simple, common sense ideas.
- The history of misbehavior goes back a very long time.
Common sense and good behavior are key to investing success. That’s what you get for timeless advice. It’s never new, just rewritten…and too often ignored.
Not much has changed in 130 years and counting.
We’re still our own worst enemy. Investors make the same mistakes today as they did then. The only difference is the investments — fewer street-car bonds, more ETFs.
So here’s some of that 19th-century advice for today’s investors.
The difficult part about investing is not in the making of money but in not losing it.
If it is difficult to make money — a proposition about which there will not be much diversity of opinion — it is in most cases even more difficult to keep it profitably employed. Men of prudence and skill in the acquisition of capital often show astonishing recklessness in the disposition they make of it. The strangest caprices take possession of them when it comes to the critical moment that calls for a choice of investments. And as riches are always clothed with folded wings ready to expand at the most unlooked-for exigencies, it is not much wonder that they frequently take to the winds and pass beyond recall.
It helps to know what you’re investing in.
The lesson of such cases is obvious enough. It is that no one should ever buy a moneyed undertaking without having first carefully read it. This may seem like an unnecessary warning; but in truth it is a most material one. Thousands and thousands of dollars have been lost by the neglect of this simple precaution. “I didn’t read the paper” is the explanation that has again and again and again been offered when time has disclosed a different investment from the one intended to be paid for.
Beware of the get rich quick promises of wealth found in great stories that often hide the limits of business.
In addition to their money’s worth, they have endeavored to get something for nothing, with the result most generally of getting nothing for something. It is remarkable how blind are people, ordinarily sagacious enough to make money, to the fact that property can not pay a revenue beyond its producing capacity.
The price you pay matters as much for hamburgers as it does for good companies.
The first and main thing to be studied is safety. And yet there is such a thing as going too far in the matter of prudence. The investor may pay too dearly for safety. There are securities which, compared with others that are to be had, sell at prices much above their real value. The reason is that everybody knows them to be good, and investors who don’t want to take the trouble to investigate, or are afraid to trust both their own judgments and the counsels of their friends, are willing to pay extra prices for them. But there are plenty of others that may be had at lower figures, which are just as good.
Beware of advice from people whose incentives are different from your own.
Two common and often fatal mistakes should be avoided. One is in relying solely upon the advice of a broker. No one competent to form an opinion for himself should put his pecuniary interests unreservedly in the keeping of another. Such absolute confidence invites betrayal. By far the greater number of losses to investors has been in securities purchased exclusively on the recommendation of interested commission men.
Stocks are not pieces of paper but pieces of a business. The prices will fluctuation, sometimes wildly, but the underlying business drives value in the long run.
The other mistake is in giving a preference to “listed” securities. Many persons seem to think that stocks and bonds must have a value if they are quoted at some stock exchange, forgetting how many “fancies” have been ballooned until they have burst at such places. On the contrary, such a position is likely to expose them to manipulation for purely speculative purposes. Stock-exchange quotations, as a rule, are unsafe guides to buyers. They represent not so much the value of the property as the pitch of speculation at the time. When securities are converted into foot-balls for gamblers to play with, they are pretty certain to be either too high or too low. The only advantage they can have is a readier marketability in case of an urgent need to sell; but it is at the times when such need is likely to exist that they are pretty certain to be at the lowest point. No speculative help can long take the place of real value. Securities, in the long run, must stand upon their merits, and purchasers have merely to follow business principles as taught by the canons of common sense.
Buy low, sell high. Be greedy when other’s are fearful. The mantra is as old as the hills and still ignored.
There are opportunities to be looked for as well as pitfalls to be shunned. It is during periods and seasons of depression, when securities are forced upon the market, often to be sacrificed — and they are certain to come if waited for long enough — that the shrewd investor finds his richest harvest. That, however, can not be said of the ordinary investor. He usually buys when securities are up and confidence is unimpaired, and becoming frightened as market values go down sells when they are at the bottom, and holds his money to reinvest in something else no better, and probably not as good, when the tide has turned. As a rule, the best time to invest is when others are unloading. In money matters it is never safe to follow “the crowd.” Nor is it safe (which, however, is little more than the expression of the same idea in another form) to purchase a security when it is on the “boom.”
The cycle of market fads never goes out of style. What’s popular today will be shunned tomorrow and replaced with something new and exciting.
A peculiarity of our money market, conservative as it is popularly supposed to be, is that it is constantly changing its favorites. Its offerings come in waves. Its dealings at one time may be chiefly in railways, at another in municipal obligations, and at another the excitement may run to mining shares or mortgages on ranches and real estate. For the time all professional brokers and bond and share sellers urge their customers to adopt the popular issue, of which, as the result of the increased demand, there is almost certain to be an excessive if not fraudulent production. To yield to the pressure at such a time is always risky. Old and tried securities, like old friends, are likely to be the truest and best.
Be patient. The market consistently offers up new opportunities. Lowering your standards — because none exist now — leads to worse results.
One thing the investor would do well never to forget, viz., that there is always plenty of good securities in the market. No one with money need ever fear that others will get all the solid investments, and, in the apprehension that there will not be enough of that sort to go round, put up with an inferior article. Don’t let him choose what is not altogether satisfactory, under the impression that nothing else as good or better will offer. If he does so, sooner or later he will regret it. Something good always comes to him who waits with money in his hand.
Don’t put all your eggs in one basket…or one country. Diversify.
Another thing of a precautionary nature it is well enough for the investor to do, and that is to scatter his purchases. The old adage about putting all the eggs in one basket applies with peculiar force to investments. The tendency…is to make up their minds in favor of a single line of securities and put everything there. Of course, a failure in that quarter is particularly disastrous… It is well enough to scatter in kind as well as in locality.
Investors are great at projecting recent experience into the future and fail to account for future changes in competition, innovation, regulation, bureaucracy, or simply poor management decisions — the bane of highly successful profitable businesses.
Investors are altogether too prone to accept present realizations as evidences of future profits. It may be taken as a rule that, in this age of plentiful money, no legitimate business that is open to public competition will long pay exceptionally well. The greater its earnings at first, the stronger will be the competition in the end.
In handling shares the highest art is in selling rather than in buying. That is something that the most of investors do not understand. They hold on too long. When they have a good thing, they infer that it will always remain so, and accordingly retain it until its value has departed or greatly deteriorated. Stocks require constant watching.
Investing is simple, but never easy.
To buy at a low figure and sell at a higher, or to sell at a high figure and afterward buy at a lower, seems such a simple operation! It almost looks as if you could go into Wall Street and pick up money from the sidewalks. Those who have made the attempt, however, have found the practice very different from the theory. When the cleverest operators, the trained habitues of the street, so often make shipwreck, what hope is there for the inexperienced? A loss, however, is usually incurred before the real difficulties of the situation are realized, and then…out of sheer desperation or from the fascination that attends the game, the determination to try another chance, and in that way good money is thrown after bad until ruin is reached… They lose because they want to make money, are not particular how they make it, and flatter themselves that they are sharp enough to win where others have failed. They are their own victims.
The Art of Investing by J.F. Hume
100 Year Old Investment Advice
John Maynard Keynes on Human Nature and Markets
Lessons from an Old Book on Market Psychology