Should you act on these investing rules of thumb?

Greed has a way of wiping out portfolios. Use caution, writes Peter Hodson. The market is not a lottery ticket. Photo by Sarinyapinngam/Getty Images

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The market climbs a wall of worry

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We have all heard this one. It connects the equity premium that investors get for taking on risk in the market. Right now, we do not think it has ever been so accurate. There are so many things to worry about: multiple wars, inflation, valuation, presidential assassination attempts, oil, interest rates, earnings, AI-spending, AI-disruption and so on. You name it, and investors are probably worrying about it. Still, most markets hit more record highs again this week, as investors collectively said, “if there are so many worries right now, maybe there will be fewer in the future.” Optimists continue to make money.

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You can never make 10,000 per cent if you sell after 100 per cent

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Mathematically, of course, this is 100 per cent accurate. Selling a stock after a double seems great at the time but if you are going to sell the next Apple Inc., or Alphabet Inc., then maybe not. I will give you my real life (sad) example here: I was fortunate enough to buy Nvidia Corp. in 2016. It went up for a while and then soared. Of course, I practised prudent portfolio management and sold shares along the way. This week, though, the stock hit an all-time high. What does this mean for me? Well, it means that every single share I have ever sold was the wrong thing to do, at least from a profit-maximization point of view. Sure, maybe it was the right portfolio move, but it is still hard to watch it keep rising knowing how many shares I sold much lower down. Where does the market stand on this rule today? Well, we at 5i Research Inc. ran a recent Bloomberg screen and in North America found more than 1,900 stocks that have risen more than 100 per cent in the past year alone. Sure, some of these are tiny, risky small companies. But also more than 70 have market capitalizations of more than $50 billion. If you own one of these, maybe think twice about letting too much go.

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Bulls and bears make money but pigs get slaughtered

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This rule is always true. Greed has a way of wiping out portfolios. We are seeing some of this in the market today. Zero-day options still trade, leveraged exchange-traded funds (ETFs) remain very popular, the use of margin is at a record and prediction markets, which are essentially one-way bets, have exploded. Cryptocurrencies can get 40x leverage and risky investments in the quantum computing and other sectors are seeing their prices soar. There is not much we can say here: There will always be greedy investors and there will always be ways for people to lose lots of money, fast. Keep an eye on leverage and stick with quality. Remember, markets are high now, but drawdowns of 30 per cent and more are fairly common. Use caution. The market is not a lottery ticket.

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A concentrated portfolio is the way to get rich

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This is indeed true in theory but hard to enact in reality. Elon Musk, the richest person in the world, is the embodiment of this, as when Space Exploration Technologies Corp. (SpaceX) goes public he will likely have more than two-thirds of his entire US$1 trillion (expected) wealth tied up in just two companies. But such concentration is very hard for normal individual investors. Sure, Musk could lose a couple hundred billion dollars and still be able to feed his kids. For a Canadian saving for retirement, though, losing half of a $350,000 registered retirement savings plan (RRSP) account would be a devastating blow. Our suggestion for today’s market? Be reasonable. Six stocks are probably too few. But if you have 50 stocks your portfolio is going to be essentially an index, and that is not the way to get above-average returns.