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Investing for Geniuses and Idiots

11 | By Shah Gilani

Let’s talk about investing, in human terms, and how to consistently make money by being a simpleton.

Everyone loves to complicate things, which is detrimental to your financial health, especially when it comes to investing.

Personally, I think the quest for meaning has something to do with human nature (at least for humans with a modicum of intelligence) and our need to find the meaning in all things.

“What does this mean?”

“What does that mean?”

“What is the meaning of it?”

“Meaning what?”

We just have to know, don’t we? Why? Because we think if we understand the meaning of things, then we know. Knowing may be an absolute, but not when it comes to meaning.

Meaning, in the sense we’re talking about, isn’t knowledge. It’s more of an interpretive thing.

And that’s the problem with trying to find meaning in everything that moves markets.

Take for example how you interpret the meaning of actions taken by the Federal Reserve, by banks, by Congress and by other investors. Somehow, we think that if we know the meaning of others’ actions we can dig down into some deep base of knowledge and make “more better” informed investment decisions.

Well, here’s the rub: While the search for meaning may be worthwhile as an endeavor, especially if you’re making long-term, locked-in investment decisions (which is mostly inadvisable , unless you’re buying a house), it’s more a waste of time and money than you realize.

If you want to make money in the markets, you have to make decisions. There are only two decisions that matter, only two decisions that you have to make, ever.

Trust yourself.

In the back of your mind, without even consciously trying to figure it all out, you probably get it. Most people actually get lost subsequently trying to get “meaning” consciously – looking for the meaning.

Like I said, making money is about two decisions only. They are: Buy it? Or Sell it? That’s it.

Take the whole fiscal cliff trap – and how you’resupposed to invest under present circumstances…

We all knew the fiscal cliff was coming. And we all know that they didn’t fix anything.They’ve just kicked the can down the road again. So what does that mean for the markets?

Buy or sell?

It doesn’t matter. Or, at least it shouldn’t matter. Why? Because nothing has happened so there’s nothing to do. If you’re invested, don’t complicate things. Don’t look for any meaning in any of this.

Here’s how I untangled all the meaning I tried to interpret from all of the things that were happening this past summer.

First, I stopped trying to look for meaning where there was none.

Second, I looked for what I knew and hung my hat on that.

The Fed was doing more quantitative easing, keeping interest rates low, and stuffing the banks with money. There’s no looking for meaning in that. You could look at what that means for the state of the economy, or the state of banks, but that’s too much looking for meaning.

The Fed easing means markets are probably going to go higher, or at least the Fed is going to provide a backstop. That means buy, not sell.

So, this summer, in both my investment newsletters, we bought high-yielding, high-paying dividend stocks for income that we weren’t going to get anywhere else. And we took several positions that made sense because they diversified our portfolios.

We didn’t sell anything going into the year-end with all the fiscal cliff talk about what it would mean. We did buy some portfolio insurance, which was simply a buy decision.

And here we are today. We rode out the fiscal cliff because we didn’t know what any of it meant. So it all got reduced to “do we buy or sell?”

That’s what we did. We bought some downside protection and had stops in place on all our positions in case the meaning of going over the fiscal cliff was: SELL.

That’s it, it is just that simple.

I’ve made money in the markets every year for some 30 years – in spite of the fact that I look at what things mean (after all, I’m only human). For me and for you, making money has to do with only two decisions. Personally, I don’t put a lot of meaning on either of them.

If I buy and I’m wrong, the only meaning that has is that I made a bad decision. I fix that by making another decision. It’s not hard.

If you want to make money, make decisions. Stop looking for meaning and make buy and sell decisions based on whether you are making money or not.

Best,

Shah

11 Responses to Investing for Geniuses and Idiots

  1. Publius says:

    Buy it. Sell it. Do nothing. That’s at least three possibilities, and you said there were no more than two.

    And of course there are many more decisions. Buy what? There are so many choices. Diversify or concentrate? Use leverage? Sell short? Buy or sell puts and calls instead of the underlying security? I could go on.

    Beware of people who oversimplify, just as you should beware of people who overly complicated things. But who defines “over?”

  2. Henry Paasonen says:

    Shah, yes, as you so clearly state: “Meaning” is the radical issue in any investment decision — indeed, in any decision making. We don’t invest or do anything that is meaningless, do we? It’s a “simple” issue (to use your term) for a simple reason: For each of us, the source of “meaning” is pre-cognitive, or presuppositional — in other words, what is meaningful for you or for me is knowledge or conviction we have even before we think about any decision we make. We presuppose “meaning” before we even consciously make an investment or any other decision.. Epistemology. Therefore, when you conclude your investment advice that “it is just that simple”, it ain’t so, Shah. I think we can, to a certain extent, predict failure or success of any investor or decision maker if we can identify that which is most radically meaningful for him or her. Not a simple question of attitude, either. I dare say what most of us affirm as most meaningful in our decision making is the result of a pre-cognitive value or meaning we have not yet consciously identified. Maturity in investment is knowing that essential good and acting according to it. The most radical aspect of that so decisive determinant of failure or success is this: Many investors lack a truly meaningful compass in investment — as they do also in daily living. Daring to go further I would raise an even more radical question: Do not many of us actually suppress a true value of the good life or of a meaningful good — suppress it so that we can make decisions which thrill to the risk of greed, or which rush into safety out of fear of uncertainty? Risk taking can so easily repress the truly good and meaningful in life just to enjoy the “high” of risk taking or just to rush by fear into “secure” investment. Not so simple. The mark of maturity in investment decisions is knowing what is most meaningful, and acting wisely according to that essential good. So, what is that radical meaning in your life, Shah? How do you tell that to your children or grandchildren? Reality check: What do you want on your tombstone? Life was worth living because ….

  3. Michael says:

    Thanks Shah! With the current unknowns and the can-kicking thats going on only speculation exists really. You have better odds on just throwing Darts at the Dart-Board over buying into this market.
    I’ve held Silver Bullion for going on 2 years now and am a patient person.
    It’s done exactly what I hoped – it hasn’t lost, though it’s not going up either. It seems to have dug into a Bunker at $30/oz. The thing that confuses me about it though is why does it still move with the market?? With all the devaluation over the past 2 years from the wizard of Oz’s (Ben the all wise) why hasn’t Silver or Gold broken from the markets and developed a Beach – Head of Value? Is it because of the manipulation going on through HST by the big players to keep them artificially low? Just wondering what your feelings are while I wait until the smoke clears!
    Happy New Year – Mike

  4. ASHLEY GOODMAN says:

    BRILLIANT AS USUAL. THE COUNTRY IS BROKE. THE DOLLAR IS WORTHLESS AND CONGRESS AND THE PRESIDENT ARE PRETENDING THEY ARE SAVING THE GOVERNMENT. THEY ARE MERELY TRYING TO SAVE THE BILLIONAIRES BY GIVING THEM ENOUGH TIME TO GET OUT OF THE DOLLAR. WHILE THEY FLOOD THE WORLD WITH ENDLESS ROLLS OF TOILET PAPER. .IT IS SO SAD WATCHING MY COUNTRY DIE.BECASUE OF HORRIBLE MISMANAGEMENT. WHEN WILL THE FIT HIT THE SHAN?

  5. H. Craig Bradley says:

    THE MEANING OF COLLAPSE

    I wonder what the point of making money is when all the money you make is tied-up inside the United States, its financial institutions and markets, and more importantly-denominated in U.S. Dollars. Reminds me of some old blokes who were playing a high stakes poker game on the H.M.S. Titanic the evening before it hit the iceberg and sank with most hands lost. How about the meaning of futility. Self deception?

    What happens if all my profits are then taxed at a higher capital gains rate or whatever, AND the U.S. Dollar is seriously devalued or inflated at 20%/year because Congress and the President are incapable of changing policy? How about the failure of a major bank or brokerage house where many of my accounts are? Will SPIC and the FDIC really make me whole? Doubt it. Future Capital loss of unknown proportions. Try hedging that one.

  6. Djin says:

    I must agree with Shah, except there are 3 decisions. I’m sitting back right now. Watching,,..

    MEANING has no RELEVANCE in this environment..

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