The four most dangerous words in investing - Investing - Forums (2024)

Sir John Templeton once said the four most dangerous words in investing are "this time it's different". I'd like to propose a new four;

"if you'd invested in..."

I hear this phrase so often in investing. The reason I think it's so dangerous is it leads people to believe that the performance of whatever's being referred to will repeat. And that's usually not the case. Almost no investments will carry on being a top or bottom performer forever.

It's also said with the benefit of hindsight. It's easy to say you'd have been better off investing in a tracker, or this fund instead of that one. But you can never invest in past performance. You can only invest in unknown and nearly impossible to predict future returns.

You must agree that some people do seem to have a certain skill. Or is it luck? And can luck last? It's the same with CEOs (and PMs).

The past is the best, and possibly the only, guide to the future!

Whether the past is a manager's CV and past performance, or last year's (or last week's) accounts, or whatever. Moment is a fact. Trends tend to continue, especially if taken from recent past and extrapolated to near future.

With people we think of parents, upbringing and education, nature and nurture; and it seems to work on average.

Sorry, this does not make sense.

There is a difference between annoying words and dangerous words.
"If you'd invested in" is an annoying phrase; telling someone he should have invested in Fevertree 3 years ago is annoying, but not dangerous; nobody has a Tardis in the investment world.

"This time it's different" can be dangerous, because it is said with future intent: you are telling another person that she/he should act on the basis of your statement.

In that case you'll probably want to know the best performing stock market in 2018 was the Jamaican Stock Exchange. If you'd invested in it at the launch of Fundsmith in November 2010, you would have made a gain of over 500% vs around 320% for Fundsmith. Better get investing.

If skilled or lucky managers could be identified effectively, other funds would simply mirror them, and the outperformers would become the average.

Things can trend, but getting in and out of trends makes you a trader – which is a game in which exactly half the money playing loses (being that every trade involves a buyer and seller).

On the topic of danger – among traders, the most dangerous state is to start believing you're good .. Sheep do fine in momentum-driven rallies .. But at some point trends turn, and value and underperformance become the best predictors of returns.

I would argue that providing the phrase...

"If you'd invested in..."

Is followed by...

"...a broadly diversified passive portfolio"

Then for most long-term private investors it would turn out to be the safest and most profitable phrase in investing.

"An opportunity to average down"

"I think I'll top up"

(both usually applied to some dog share where the price graph starts in the top left hand corner and ends up bottom right)

In contrast the four most helpful words in investing are "compound growth" and "drip-feed".
I rarely meet anyone - including partners in accountancy firms - who really UNDERSTAND compound growth.
Einstein called it the 8th wonder of the world.
Being able to apply the formula doesn't mean that you understand it. Everyone should spend time playing around with the formula, so that they have a complete understanding of how it works.
The key point is that the longer you're invested (decades, not years, months of weeks), the greater the opportunity for compound growth to work its magic.
Therefore start investing when you are exceptionally young and/or choose parents who can get their heads around simple mathematical formulae and have a few spare bob.
Drip-feed works because if you invest monthly by Direct Debit when you are 20 you will probably forget about it, and receive a nice surprise when you are 60.
Drip-feeding means that you invest what you can afford, you are unlikely to sell when there's a correction and you likely to keep investing.
You many even forget that you are investing on a monthly basis which is excellent.
If you shelter it in an ISA or Lisa all the better.
It's really very simple.

Ten "most safe" words are given below.

"If it's too good to be true it usually is".
The problem with applying the 10 most safe words is that some investors apparently can't judge when something is too good to be true.
They obviously think it's reasonable for some outfit to offer 8% when bank rate is less than 1% and it's difficult to find a BS which offers 2%.

Another eight most safe words are:-
"don't put all your eggs in one basket."
Again these eight most safe words seem to be difficult to apply. Perhaps the connection between carrying eggs home in a cardboard box in a basket from the supermarket and investment seems tenuous.

For a change, the seven most dangerous words in investing.
"It's regulated by the UK Regulatory Authorities".