Twenty-five Rules of Investing:  1  |  2  |  3  |  4  |  5  |  6  |  7  |  8  |  9  |  10  |  11  |  12  |  13  |  14  |  15  |  16  |  17  |  18  |  19  |  20  |  21  |  22  |  23  |  24  |  25 

 

 

Bulls, Bears Make Money, Pigs Get Slaughtered

 

 

Rule 1

What would you do if I told you the Nasdaq were to go up 1,000 points between now and November? What would you do if I told you the Nasdaq was going to double by December? How about if I told you that after it doubled, you would then catch another 1,000 points up by March?

First, I think you would tell me that I was nuts, and not worth listening to. But what if I were so persuasive that you believed me. Wouldn't you want every penny you had in the Nasdaq right now?

Or would you say, "Nope, not for me, this one's not worth catching. I don't want the 1,000 points, I don't want the double and I certainly don't want that last 1,000 points. Way too dangerous for me."

From the way people talk these days, with sober intonations about the market, total sobriety, you would believe the latter. You would think that people would avoid that 3,000-point move like the plague. Because we know how that 3,000-point up move turned out, we know that we simply climbed the stairs to jump off the tower.

Yet, that's what happened six years ago, that exact same sequence. Knowing what we know now about how hard it is to make money in the market, I think we would regard ourselves as utter fools if we avoided that incredible move simply because we didn't have to jump off the tower of Nasdaq 5000. It wasn't inevitable.

It wasn't inevitable unless we are pigs.

Which leads to one of my absolute favorite adages:

 

Bulls make money, bears make money, pigs get slaughtered.

 

Rules like that one — simple, nonquant and yes, nonfinancial rules — saved me in 2000.

These days there's plenty of revisionist history on the part of financial commentators, editors and occasionally even brokerage house personnel — if they let themselves wax philosophical — about what happened when the Nasdaq bubble burst. Those who tried to capitalize on it are now ridiculed. Those who avoided it are now held up as some sort of paragon worthy of Diogenes.

Hardly.

The truth is that for one year of our lives, the Nasdaq gave away money to those who were bulls, but after 3,000 points, the bulls morphed into pigs and everyone who was piggish got annihilated.

So often, when I bring this adage up, people ask me "How do you know when you are being a pig?" I know there's not supposed to be any stupid questions out there, but the answer is, frankly, you don't need me to tell you. If you weren't feeling piggish after we hit an all-time high on the Nasdaq in 2000, you needed a shrink, pronto.

Remember, my goal is to stay in the game. The people who got wiped out by the Nasdaq crash tended to be people who never took anything off the table, who never felt greedy, who got slaughtered by their own piggishness.

Unlike so many others I see and hear on television or read in articles, I have no regrets about liking the market during that period. To have avoided those 3,000 points would have been sinful. It would have been suicidal for a professional manager.

But it was my desire not to be a pig that kept me in the game in March and April of that year. That's why I remind people every day: Have you taken your profit? Have you booked anything? Or are you being a pig? Because you never know when things you own are going to crash. You never know when the market could be wiped out. You can't have certainty. At those times, you have only human nature to guide you.

Whenever I struggle with a stock in my Action Alerts PLUS portfolio because I have booked so many profits that I feel I don't have enough on my sheets, I console myself with the simple lesson of Nasdaq 5000. For example, I caught the oil move in a prudent way that made me a lot when it first started but couldn't make me as much later, simply because I had taken stock off because I didn't want to be a pig. That meant I would make less money than others who were in the patch. I accepted that, as I do every time I make the decision not to be a pig.

It's the price I have to pay for following my adage. It always seems a high price when things are going well, as it did in March 2000 when I sold so much stock.

Until I look back and realize that my desire not to be too greedy saved me so I could live to play again.