I started typing a reply to this post by Roger Montgoemery and as it turned into a missive I thought it best to relocate my reply here.

Hi Roger
I’m looking forward to your book, especially as you claim it contains a “completely new, unique and original approach to valuing companies“. I guess you don’t believe in there being nothing new under the sun.

Great topic and I totally agree investing clichés can be hazardous to ones wealth. However, I question your choice of clichés.

1. You can’t go broke taking a profit. I agree that’s a bad cliché and a better one for investors to follow is water the flowers and pull the weeds. Though as with all generalisations even that Lynchism cliché is only roughly right and intelligence/art needs to be applied to its implementation.

2. ‘Its ‘Time in the market’ not ‘Timing the market’ that leads to success.’ Swapping out of reply mode: I think Roger totally misses the point of this cliché or at best misrepresented it. The key word is market, not individual stocks as he chose to focus on. The point of this cliché is to convey one of the cornerstones of finance and investing, that is compounding. Without understanding compounding an investor has little chance of success and will make many mistakes. My problem with this cliché is that people mistakenly think it means that anytime is as good as any other to invest in the market.

Let’s take a look at some of the other clichés Roger doesn’t like as I beg to differ with his bald assertion that they are “useless and information-free“.

• Sell in May and go away. Historical evidence shows that market investors would be better off doing that.
  “we find this inherited wisdom to be true in 36 of the 37 developed and emerging markets studied in our sample. The ‘Sell in May’ effect tends to be particularly strong in European countries and is robust over time.“ Yet another paper on Sell In May states, ”on average, stocks deliver close to zero returns in the six month period from May through October, only giving a risk premium from November through April“. While I do not advocate following that kind of mechanical approach, it’s useful to understand historical returns in the stock market.
• Don’t catch a falling knife. This conveys one of the most important behavioral errors people commit, anchoring. At the same time it points out how markets are not rational and overextend to the downside. Ignoring anchoring and the propensity of markets to over-react is not a wise path to travel.
• ‘Feed the ducks while they’re quacking‘ and ‘buy dips’ are clichés among stock brokers to help increase their revenues. They’re not investing clichés, but rather maxims for stock brokers to extract more profit out of investors.
• Buy low and sell high. Is the principle of arbitrage and is OK advice which can be easily implemented. For example two assets in a portfolio, one US treasuries the other US index fund. If you want a 50/50 split then whenever they become unbalanced by a predetermined margin, the act of re-balancing them will enforce buying low and selling high.
• This time its different. I’m not sure why Roger included that one, as it is never different this time. Here is a must read on the topic.
• The trend is your friend. Momentum studies like this, Momentum Strategies by Louis Chan, Narasimhan Jegadeesh and Josef Lakonishok, reveal how past earnings surprises predict large drifts in future returns as analysts and the market are slow to respond. The moutain of evidence is almost as high as the number of clichés surrounding it, e.g. don’t fight the tape.

While I applaud the idea of debunking investing clichés, it makes better sense if the clichés should be debunked. For example shorting stocks has limited reward and unlimited risk. Which is total rubbish, based on lack of understanding of real life investing, but that is the topic for another post.

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