Advice from Dr. Pfleider or Woody Allen?
In March of 2010 I had the opportunity to study at the Stanford Graduate School of Business. It has been seven years since I listened to Paul Pfleidrer speak at this event, but I have not forgotten and doubt I ever will forget one thing he said. “For every trade there is a winner and a loser.” As simple as this statement is I have found it to be profound and it impacts my daily investment decisions. At first I struggled with this statement, causing paralysis in my decision making. Boiling it down even further if I am selling XYZ stock then there has to be a buyer, and buyer & seller have totally opposite opinions. We both can’t be correct! If XYZ goes up then I lost, if it goes down then I won. The second guessing of you decision goes on and on.
This concept is not just limited to one trade on a single day, but can be extended to long term economic and thematic trends. If you were a horse buggy manufacturer at the beginning of the 20th century you lost, versus the new auto manufacturer. However, from 1896 to 1930 there were 1,800 US auto manufacturers now there are three, that is a 0.166% success rate. That’s 1,797 losers and 3 winners. Did you have to pick those three to win, or did you just have to participate to win? What about the tech boom and bust, or the real estate bubble? Who won and who lost (we can save that discussion for another time)? Do I have to be right twice every time?
The answer to all these questions is no! We don’t have to worry about whether we win or lose on the minutia of every trade. Dr. Pfleidrer is correct in regards to the transaction. He gives valuable insight to the other side of the trade. However, this statement does not apply the long term individual investors. As Woody Allen said “80% of success is showing up”. Sometimes we are right and win and sometimes we’re wrong and lose, this is an inherent risk of all investments. This risk presents itself in varying degrees depending how conservative or aggressive one wants to be. We will always lose if we don’t show up.
Too frequently I meet people who tell me that they are going to wait to invest till: the election, or the market drops, or the market gets better, or (insert you own excuse here). Most often the only losing bet is sitting in cash, money markets, or bank deposits. The returns are insulting and negative when inflation is factored in. Exceptions to this are emergency funds, cash flow needs, or money for large expenses in the short term (less than 3 years). You may have some other legitimate reasons for cash as well. Parking money in cash and not making an investment decision can come with huge opportunity cost, and loss of dividends and interest payments.
Going back to Dr. Pfleidrer in every economy there are always winners and losers. With this in mind, there will always be a place to put money to work from high to low risk choices. To make that investment decision it becomes important to define your objectives, time horizons, and formulating a plan and goals for your money. Doing this gives us that benchmark we need in order gage our success.
Raymond James is not affiliated with Dr. Paul Pfleidrer. All investing involves risk and you may incur a profit or a loss. There is no assurance that any investment strategy will be successful. Dividends are not guaranteed and must be authorized by the company's board of directors. Any opinions are those of Matthew Apple and not necessarily those of Raymond James.
