When it comes to gift-giving, some of the very worst advice gets bandied about at this time of year. Take, for example, the recommendation to give children books for Christmas on the assertion that they’re not fattening and are good for them. As Kin Hubbard says, nothing’s as mean as giving a little child something useful for Christmas.
Except, perhaps, giving investors nothing useful by way of investment advice.
But since selecting Christmas gifts isn’t too different to selecting the right investment (just more fun), here’s a little advice for doing both:
Timing’s important. Prices of Christmas-related stuff — trees, decorations, toys, and so on — are at their highest a few days before Christmas. They’re at their lowest the day after (though that’s usually too late).
Stocks, likewise, are at their highest just before a market correction and at their lowest the day after.
That, however, is where the similarity ends. When did you last hear a colleague say “I knew the Christmas pud market would go down, didn’t I, didn’t I?” Never. Why is that? No, it’s not because we are better at predicting the price of Christmas puddings, it’s because instead of buying on the expectation that something will happen, we buy because something has happened — puddings just got cheaper.
Don’t buy last year’s winners. We were all children once upon a time and we know the lure of the trendy toy item. We also know where last year’s fads end up: in a corner under the bed. A similar loss of popularity often awaits last year’s outperformers. Chasing performance is dangerous, yet it happens again and again; the late 1920s, the nifty-fifties, tech in the late 1990s. Last year’s top performers attract the new money and investors follow like lemmings. Buy and hold doesn’t always work. Some people make a great gift selection and then stick with it year after year. They don’t replace the old with the new. The problem with that is that the happiness quota attached to the original gifts eventually decreases.
Likewise, yesterday’s good company may not be today’s great investment.
Go wide. Why be boring? Look for something different. A Häns Screen Cleaner. Anyone that’s constantly on their smartphone will love this tiny little cleaner. A Tortilla Baby Wrap. It comes complete with a hat and is made from a stretchy poly-cotton blend.
Diversify, learn to sell short, look at derivatives, go offshore.
Be sceptical of track records. Sure, somehow, Santa’s always managed to deliver on his promise. So has Uncle Ted. But that’s no guarantee they’ll do so again this year.
With enough monkeys in the room, one of them will type out Hamlet. But it doesn’t mean the same monkey will then go on to write Macbeth.
Look for red flags. For those who know what to look for, there are always clear signs that things are going to be a little lean: when socks and sweaters are the popular buys, when the expensive toys are staying on the shelves, when the small Xmas trees are getting sold before the large ones … don’t expect too much.
Trust in the cockroach theory, and act on it. Like that lowly bug, bad news on a company seldom appears by itself; it’s more likely to be followed by others. So why remain loyal to underperformers? Stocks are not insulted by your selling them. Move on to what is working.
Avoid misplaced priorities. More information can be helpful in making a decision but, as Daniel Kahneman warns, people spend proportionally too much time on small decisions and not enough on big ones. “They need to adjust the balance,” he says.
Buy what you know. Think you really know what Santa’s going to bring you this year? Face it, there’s no way you can. Not with all the secrecy and mystery that surrounds it.
Great investors have a grasp on the changes in the drivers of profitability and never own the stock of a company they don’t understand
Look for value. Look for the big sign at the front of the store that says “40% Off!”
Martin Whitman, who built a reputation for only buying at a big discount to net asset value, says it is absolutely crazy to pay more than 60c on a dollar for noncontrolling interests in a business, as outsiders always face agency problems.
Avoid the herd. As James Hamilton-Peterson says: “One Magus going to Bethlehem would probably have sprung for a box of After Eights. Three Magi on the same trip found themselves laden with gold, frankincense and myrrh and bitterly contemplating their overdrafts.”
Don’t put too much at stake. As someone so nicely put it: “Money’s scarce, times are hard, here’s your f****ng Xmas present.”
“Never borrow to finance portfolio holdings,” says Whitman. “Prices in markets populated by outside minority investors are just too capricious to permit this activity to be undertaken safely and conservatively.”
Last, but not least … enjoy the game. Once opened, Christmas presents are seldom as much fun as they were while we were in the process of examining, lifting, shaking, thinking about, and opening them.
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