Stock market wisdom
In the financial world, there is a lot of advice and tips that are supposedly guaranteed to lead to absolute success when investing. These so-called share market wisdoms are meant to explain briefly and concisely how to be successful on the stock exchange and what you should absolutely avoid. For the most part, these sayings come from well-known personalities in the financial world who have spent years studying the subject. But how much truth do these stock market wisdoms actually hold, and what exactly do they mean?
1. "Constant switching empties your pockets"
This phrase describes a circumstance that applies to virtually every investor. Frequent transactions on the stock market are costly and are also proven to diminish the long-term performance of your portfolio.
This is because investors who try to beat the market through frequent deposits and withdrawals will quickly find that no one can predict the market – and that it is therefore better not to try in the first place.
2. "Don't put all your eggs in one basket"
This stock market wisdom refers to so-called diversification. The absolute best way to achieve the highest returns with the lowest risk is to diversify by investing in a very large number of individual stocks, rather than picking a handful of shares that you hope will be the winners.
Diversification is an economic miracle for which Nobel Prizes have already been awarded, because only through it is it possible to achieve the optimal balance of return and risk over the long term.
The trick here is that the expected return remains constant, while risk steadily decreases with greater diversification. In practice, diversification means that your portfolio should be split across different asset classes and styles, countries, company sizes and sectors.
3. "Don't catch a falling knife"
This quote shows why pro-cyclical investing is so problematic. Many investors act in a pro-cyclical manner – they buy shares when prices have already risen and only sell after a price drop has already occurred.
So you could say: they miss out on most of the price rise, but they experience most of the subsequent downward phase and then sell their shares at the absolute lowest point out of panic.
You should definitely avoid this mistake in order to truly benefit from developments in the capital market.
4. "Buy when the cannons thunder, sell when the violins play"
On the other hand, it is better to opt for an anti-cyclical investment – as is also made clear in this quote from banker Carl Mayer von Rothschild.
The concept of anti-cyclical investing is to continuously buy those securities that are undervalued, and in return to realise profits and sell highly valued stocks.
Particularly in crisis situations, many professionals pursue an anti-cyclical investment strategy, which is also the core strategic investment philosophy behind the Ginmon investment strategy.
5. "Sell in May and go away"
This stock market wisdom is based on the claim that stock markets perform worse in the summer months than during the rest of the year.
Even if it is indeed true that investment activity on the stock exchanges tends to be slightly weaker in the summer months, no sound investment strategy can yet be derived from this.
Analysis also proves that following this advice does not yield a better result than if the shares are held over the summer months.
In general, you should be extremely cautious when it comes to stock market adages that promise to predict the perfect times to enter or exit the stock market.
It is better to be constantly and long-term invested, for example with a savings plan. This way you can avoid missing the "best days" on the stock market and can constantly compensate for poor phases.
6. "On the stock market, 2 times 2 is never 4, but 5 minus 1."
This quote is intended to express that you should always keep your nerve on the stock market in order to endure the year with the "minus 1".
Stock markets do not rise linearly – short-term downward swings are therefore completely normal. You shouldn't let this drive you crazy. Especially when looking at the all-time performance of the MSCI World, standing through turbulent market phases and risks has proven to be worthwhile.
Although this takes nerves of steel, it has always paid off in the long run. In general, it is important to leave your emotions out of capital market investments, as these can lead to rushed and ill-considered actions.
Conclusion
In conclusion, it can be said that most stock market wisdom contains a certain element of truth and can also be used as a guide for investing in the stock market.
Nevertheless, there are also stock market sayings that contradict each other or that may have worked in the past – but are simply no longer up to date today.
You should be particularly careful with stock market adages that attempt to predict perfect entry and exit timings in the market, which is simply not possible.
Fabian Knigge, Chief Investment Officer at Ginmon
Ultimately, everyone has to decide for themselves which wisdom they want to follow and how they want to approach an investment in the stock market.