Short Burry, Long Lynch
Pick bottoms, you’ll get smelly fingers - A slightly revolting and overly regurgitated market analogy but one which has stood true to the test of time. It’s certainly saved me from many a scrape over the years, not to say I didn’t rebel against such insight with little avail in my early years.
“Here’s a great one, it’s $3, how much can I lose? *Academic audience chuckles* This is a great one, I don’t have a computer and I can’t do high level math but just do this once - let’s say your neighbour buys $10,000 worth of stock at $50 and the stock’s now at $3, if you put $25,000 in at $3 and it goes to zero, who loses the most? *Further cackles* A lot of people cannot answer this question. I mean if you put a billion in at $3.00, you can lose a billion”
Legendary fund manager Peter Lynch giving a working example of buying the dip. For those who aren’t au fait with Peter Lynch, he averaged 29.2% annual returns between 1977 and 1990 for the Megellan Fund, which was consistently double what the S&P 500 was returning at the time. So take note when he talks.
Speaking as an investor and trader of more than 10 years myself, luckily, I can count the number of mistakes I’ve made on just a few fingers. And apart from just one occasion, the mistakes have always boiled down to one issue – my unyielding ego.
I remember buying my first stock at my newly opened share dealing account – “I’d like to buy £2,000 worth of Range Resources please” I timidly asked, having no idea what the protocol was. The dealer abruptly responded with some stock market jargon “Market or limit order – Day or GTC?!”
Having been made to feel like a complete amateur and that I was wasting his time, I precipitously responded with “Just buy them at market for God’s sake!”. I didn’t know the difference at the time, but it seemed to boot the dealer into action there and then.
Despite the company’s various prospects and supposedly buoyant RNS announcements, the smart money had already scarpered leaving me and the other ill-informed forum plebs holding the bag.
“We are pleased to announce” – (this must be good surely?) I later found out every RNS (Regulatory News Service) seemed to start with that promising line no matter how dire the news may have been.
Undeterred, I believed in the unprofitable oil exploration company. All they needed was for one of their Black & Decker hand drills to strike oil and we’re laughing. Or at least that was easier than accepting I was wrong.
Not just wrong, but I had no idea what I was analysing or even looking for. Instead, I decided to surround myself in a cacophony of ‘rampers’.
The months went on, further explorational duds fell short of investor expectations and the share price resembled that of a Greek bond price circa 2009. Certainly NOT the explosive multi-bag returns I had convinced myself of.
But it didn’t matter, because I was right and nobody was going to convince me otherwise – there’s still that oil prospect in Trinidad & Tobago after all. “How low can the share price go?” I found myself saying.
God forbid I had made a completely stupid move with my initial £2,000 investment, it’s the others who don’t understand the future of this cash burning company resource explorer. Their latest 3D seismic survey starts with ‘We’re pleased to announce’, so it must be good?
“£1,500 at market, IMMEDIATELY”.
*me, averaging down countless times on a penniless penny stock
I think you can see where this is going by this point. Fast forward a few months and it took me £5,000 before eventually tapping out and throwing in the towel on my first foray into the stock market. The cost of admitting I was wrong was a very dear lesson, but a very needed one indeed.
I’m glad to report I did eventually take note of Peter Lynch’s philosophy and can confirm investing is a far more profitable experience.
Skip forward to today, and I’m now running my own brokerage firm, Mitto Markets. This is all lovely and well except I still witness the same attitudes, redolent of my younger self over and over again from new market participants - usually young men.
The notion that you’ll outperform your fellow speculators is a very powerful motive and the growing prevalence of social media certainly doesn’t help matters – because unless you’re making riches from a laptop in Palm Beach Dubai, then who even are you?!
Or even worse, romanticising that you could be the next Michael Burry by calling the very top or bottom of a market. Investing on such ego-based ideologies will not end well.
Interestingly, I had started this article with the intention of discussing the merits of ASOS given theirshares have fallen 44% from their 12 months highs. I wanted to first resight the wisdom of Peter Lynch before moving onto the prospects of ASOS.
Before I knew it, I nearly fell into the ill-informed habits I’m now preaching against. A dark realm of market psychology where ego can preside over all logic and risk management.
The merits of ASOS may have real credibility, but it could have been argued it looked undervalued at £50, £40, £35 and so on.
By all means, I’m not suggesting there’s anything wrong with identifying value but blindly sticking a pin in a low looking chart as your opening investment thesis is not good form.
Trying to thoroughly disprove your own thesis is a much better start.
I may rue the opportunity of being the guy who called ASOS a screaming buy down at these levels, however I also passed up the opportunity highlighting at the beginning of the year for the same reasons.
So if missing out on the occasional ‘screaming buy down here’ means I’m left unable to brag on Twitter for a week, I know the steady approach will win me the race in years to come.
If you’ve enjoyed this article and want to start your investing journey, feel free to reach out to me personally on t.sunderland@mittomarkets.com or call 0208 159 8985
Important Notice: When investing in shares, your capital is at risk. The value of the investment and any income from it can fall as well as rise, so you may get back less than your original investment.