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''The Folklore of the Market'' – investing lessons from the 1950s

What can a 1950s investing textbook teach us about investing today?

Important notes

This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

My partner recently bought me a 1950s edition of a DIY investing handbook – ‘How to Buy Stocks: A Guide to Successful Investing’ by Louis Engel.

The book pre-dates the existence of large funds for the average investor, with sections on “preferred stocks”, margin trading and the mechanics of a largely pre-digital stock market. However, the book’s penultimate chapter, “The Folklore of the Market”, has some words of wisdom that are as relevant today as they were 70 years ago.

This article isn’t personal advice. All investments fall as well as rise in value, so you could get less back than what you invest. If you’re not sure if an investment is right for you, please seek financial advice.

“The Folklore of the Market”

Engel is pretty scathing about “investment advice from people not equipped to give it”. The future performance of a company’s share price is difficult to determine, and almost impossible to guess on a short-term basis. Engel points to a quote by “the wisest of them all” J. P. Morgan who, when asked his opinion on the market, always simply responded, “It will fluctuate”.

That hasn’t stopped snippets of market wisdom developing over the years until they’ve been “accepted as gospel” or folklore as Engel calls it. With any folklore, “each has a certain element of truth about it – and a certain element of non-truth.”

1) “Buy ‘em and put ‘em away”

The basic idea here is that once you buy shares in a company, you should lock them away for the next twenty years and forget about them.

That’s great advice if you happen to pick a long-term winner, and in our view is better than buying and selling all your investments every couple of months. But companies, markets and economies change.

When Engel was writing, the first modern computers had barely been invented. Picking your stocks then and refusing to budge would‘ve seen you miss out on some of the great technological advances of the last century. Lots of companies would’ve also folded altogether as they were technologically outstripped.

Companies which seem promising today could disappear altogether in the future. Take Engel’s example of Stutz, a car manufacturer:

“...1921 the car everyone was talking about was the Stutz Bearcat, and there was a great deal of speculative market interest in Stutz stock. You might very well have decided to buy $1000 worth of that... [By 1939] you would have lost all your money, and furthermore you would never have collected a penny in dividends”

Apart from serving as a timely warning on speculation in today’s automotive manufacturers, it’s clear evidence that do-it-yourself investing isn’t an entirely passive past time.

As Engel says “The wise investor will take a good look at all his securities at least once a year”. Although the language in the book is a product of its time, regular reviews are just as important today as they were in the 50s.

2) “You never lose taking a profit”

This taps into the idea that selling a share when it’s up is never a bad idea.

The downside is, if you followed this rule religiously, you’d be selling all your shares the moment they showed progress and miss out on any future growth.

Take Apple for example. If you bought the shares at the end of December 2016, you’d have gained 11% by the start of February. Some might have thought about taking the profit. But, had you held on until the end of the year, the shares would’ve been up 46%. As always though, past performance isn’t a guide to future returns.

The fact a share is up today doesn’t mean it’ll continue to be a good performer in the future. But while cash in the bank is better than a paper profit, you invested your money in shares for a reason. Hopefully it was in search of long-term growth, so when your investment turns good, why would you instantly decide to sell if you think the company still has good prospects?

3) “If you wouldn’t buy, sell”

There’s actually a lot to be said for this particular snippet of wisdom.

It’s easy to get emotionally attached to companies you invest in, especially if they perform well. Equally, it can be difficult to sell shares in a company that’s done badly.

The money you invested feels like it’s already spent, but in reality you could get that cash back and invest it in a new opportunity at any time. We don’t suggest chopping and changing your investments on a regular basis – especially with trading costs likely to eat into your overall return. Instead, occasionally asking whether you would buy the shares again today can be a good exercise.

If the answer’s no, then maybe you should think about finding a better home for your money.

4) “Buy when others are selling, sell when they buy”

It might sound obvious, but is much harder to achieve in practice.

Imagine you’d bought shares in mid-2009. You’ve happened to time your purchase perfectly, and the UK stock market is close to a multi-decade low. Three years later in 2012 the market has risen over 50% and investors are increasingly positive on shares. They’re starting to buy in big numbers. You think this could be the perfect time to sell.

Wrong.

The post financial crisis bull market ran until the coronavirus crisis hit in 2020. You’ve missed out on eight years of share price growth by selling in 2012.

In reality, “Buy when others are selling, sell when they buy” is just another way of saying you should buy at the bottom of the market and sell at the top. Unfortunately, it’s impossible to make that call at the time – you’re simply guessing.

To look to Engel again. “Anyone who tries to practice this fine art is “playing the market” in the purest sense of the word, He’s speculating; he’s not investing.”

5) “Don’t sell on strike news”

This probably dates the book a bit. Industrial strikes are much less common these days, especially in large companies.

The logic was that most major strikes were already well publicised by the time they were declared, so the market is already pricing the information in. Fair enough – but not a particularly useful insight for today’s investor.

6) “Don’t overstay the market”

This falls into a similar category to number 4. No one wants to stay past the market peak, but it’s impossible to know when the peak is happening.

Having said that, the market isn’t always entirely rational. Sometimes a hard look at key data points can give you some advance warnings of trouble ahead. Share prices should reflect company profits. If the conditions of the economy seem to be deteriorating, but share prices are still climbing, that can be a warning sign.

7) “Always cut your losses quickly”

Holding on to a company sliding towards bankruptcy is clearly a bad idea. But in the short term share prices only reflect the supply and demand for a company’s shares, not their fundamental value.

Short-term swings in investor sentiment, or sales by one or two large shareholders, can cause a share price to fall. The fundamental performance of the business may not have changed though.

Back in March 2019, shares in Ladbrokes owner GVC fell 18% following the sale of shares by the group’s chief executive and chairman. But by the end of April the same year, the shares had recovered all their lost ground.

Being forced to sell by applying a hard rule wouldn’t be in your interest. It might even be a good time to buy.

8) “An investor is just a disappointed speculator”

There’s an element of truth to this – although it pains me to admit it.

Speculation is all about making a quick buck – not something we can recommend, as it’s nearly always very high risk. But deep down, wouldn’t we all like to make a quick and big profit when we buy shares in a company?

However, if the shares don’t take off straightaway, at least we can console ourselves in that we were interested in the company’s fundamental value rather than a short-term return. ‘We’re investors’ after all. The cynical speculator would look on and think there’s not so much difference between investment and speculation – speculators just cut their losses and move on.

The reality is “the small investor often has the last laugh,” as Engel puts it. Stock markets have trended upwards over the long term, and those who buy shares in a diversified pool of large companies and hold them for the long term have generally enjoyed the ride with lots of speculators having been left with nothing at all.

Speculator or not though, there are always risks when investing. Any investor could end up at a loss.

9) “A bull can make money. A bear can make money. But a hog never can”

All investors are in the market to make money, but that doesn’t mean they’re greedy unless they start to look for a higher than reasonable return.

In the long run (1985-2020) the UK stock market has given investors a total return of a little under 9% a year. Sometimes you might invest in a company or fund that does better than that. Sometimes it will do worse. 9% a year isn’t bad going though, even if future returns might be less generous. Remember that nothing is guaranteed and you could get back less than you invest.

Total return from £1,000 invested in the FTSE All Share index (1985-2020)

Past performance is not a guide to future returns. Source: Refinitiv Datastream to 31/12/2020

Start chasing returns that are consistently much higher than that though and you’re taking extra risks.

To finish off with some words from the 1950s: “forget about the other fellow and the killing he made – or says he made. Maybe he can afford to speculate. But if you’re an investor, act like one.”

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    Important notes

    This article isn’t personal advice. If you’re not sure whether an investment is right for you please seek advice. If you choose to invest the value of your investment will rise and fall, so you could get back less than you put in.

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