Market mantras: Stock market tries to make a fool of you, and how! Investing gems from Bernard Baruch


Few of the 20th Century investors stand out as much as Bernard Baruch does for his incredible investment prowess.

Regarded as one of the legends in the history of investing, Baruch’s belief in the fundamental importance of supply and demand, and his ability to recognise and take advantage of market imbalances was well appreciated in the investment industry all across.

Baruch was an investor, philanthropist, statesman, and political consultant and never hesitated in sharing his views on most topics, but he always remained sceptical when it came to giving specific investment advice.

Born in 1870, Baruch was initially not very wealthy, but liked to lead a luxurious lifestyle and was popularly known as ‘The Lone Wolf’ on Wall Street. In 1891, he started his career by joining the brokerage firm, AA Housman and Company, as a bond salesman. After some early setbacks, he achieved success by investing in sugar, tobacco, and railroad stocks. He followed his instincts and achieved greatest success during bear markets, by selling shorts when stock prices plunged.

In 1903, Baruch left Housman to establish his own firm and was influenced by several other investors and Scottish journalist Charles Mackay.

He shared his experience and provided some investment advice in his memoir,
My Own Story, which was published in 1957 in which he delivered some timeless investment gems. They are still helpful for modern-day investors to tide over any investment crisis.

“Being skeptical about the usefulness of advice, I have been reluctant to lay down any ‘rules’ or guidelines on how to invest or speculate wisely. Still, there are a number of things I have learnt from my own experience which might be worth listing for those who are able to muster the necessary self-discipline,” he said in his memoir.

  • Don’t speculate unless you can make it a full-time job

Baruch said investors need to devote some time, attention and effort while choosing their investments, if they wanted to amass wealthy returns. He felt one should refrain from getting into speculation, if she can’t pay enough time and attention to the portfolio.

Further, he said investors need to pay close attention to their positions, follow new developments in the investment world and always be ready to change or update an investment approach based on new data as it came out.

  • Beware of barbers, beauticians, waiters — of anyone — bringing gifts of ‘inside’ information or ‘tips’

Baruch said investors should remain wary of the sources of information or stock tips they keep on getting from various sources from time to time.

Many a time, inside tips and rumours leak out in the public domain, but investors shouldn’t act on them, unless the source of information is credible.

“The longer I operated in Wall Street, the more distrustful I became of the ‘tips’ and ‘inside’ information of every kind. Given time, I believe inside information can break the Bank of England or the US Treasury. A man with no special pipeline of information will study the economic facts of a situation and will act coldly on that basis. Give the same man inside information and he feels himself so much smarter than others that he will disregard the most evident facts,” he said.

  • Before you buy a security, find out everything you can about the company, its management and competitors, its earnings and possibilities for growth

Baruch says investors often make an investment without first conducting extensive due diligence on the company due to the fear of missing out on an attractive investment.

This tendency often overpowers one’s rational decision making, leading to heavy losses. So he often suggested investors to treat a share of a company as a proportional ownership of the business and understand the company deeply before investing to be successful.

  • Don’t try to buy at the bottom and sell at the top. This can’t be done — except by liars

Baruch said investors should not attempt to time the market, as it would lead to nothing but losses.

He said it wasn’t possible for even the best investing legends to accurately call a top or mark a bottom. He often advised investors to trust their investment approaches and make allocations accordingly.

He said being on the right side of a trade was all that mattered in the long run, especially for value investors seeking to hold securities for the long term.

“The bears can make money only if the bulls push up stocks to where they are overpriced and unsound. Whatever men attempt, they seem driven to overdo. When hopes are soaring, I always repeat to myself that two and two still make four. The main purpose of the stock market is to make fools of as many people as possible,” he said.

  • Learn how to take your losses quickly and cleanly. Don’t expect to be right all the time. If you have made a mistake, cut your losses as quickly as possible

Baruch says as markets have a knack for getting volatile, any investment approach however strong may go for a toss. He says many investors keep holding on to losing positions in the hope that things would somehow reverse in their favour. But if the fundamentals of a company have changed, then holding on to losses is unwise.

“If you are holding an ailing security in order to avoid the reckoning of making the loss ‘real’ via a sale, you are merely delaying the inevitable and allowing good money that might be invested profitably elsewhere to wallow in disgrace. Take the hit and move on. That is the only way forward,” he said.

  • Don’t buy too many different securities. It’s better to have only a few investments, which can be watched

Baruch says while investors should diversify their portfolios, it is sometimes difficult for individual investors to track each and every business. So it was best to focus on a few good companies for investment.

He said investors should follow extreme discipline and pay constant attention to their portfolios and choose a few high-quality companies and watch the basket closely so that it is best-suited to deliver long-term positive returns.

  • Make a periodic reappraisal of all your investments to see whether changing developments have altered their prospects

Baruch says as the market dynamics are changing constantly, one must react and adapt to those changes to spot good buying opportunities. Sometimes investors get distracted when they get bombarded with noise and other useless informational stimuli.

So they should periodically keep checking their portfolios from the start for any inconsistencies and redevelop the case from bottom up, instead of just adjusting their investment strategies at the margins in response to news or fresh data.

  • Study your tax position to know when you can sell to the greatest advantage

Baruch says investors should work out the tax implications of their investment decisions, since they can have a bearing on what they earn at the end of the day, once the taxes have been accounted for.

  • Always keep a good part of your capital in a cash reserve. Never invest all your funds.

Baruch says it is essential for investors to maintain a degree of liquidity, for both opportunity and security.

This, he believed, could be achieved by maintaining a cash reserve so that investors don’t miss out on new investment opportunities as they arise. He felt keeping a cash reserve can also help investors tide over the sudden shocks that markets can give from time to time.

  • Don’t try to be a jack of all investments. Stick to the field you know best.

Baruch says even the most experienced and best investors may not know everything and surely have their blind spots. He says it is best for investors to develop an investing edge by understanding everything about the shares in which they deal in.

This could be done by not only knowing a company well, but also learning everything about its industry, competitors, market risks, cyclical factors etc. As it is very difficult to have an in-depth knowledge about every industry or type of security it is best to prioritize the things investors understand and build up their edge in that niche.

Hence, one should try and understand the limitations and skill sets in order to cultivate an edge for long-term success, he said.

(Disclaimer: This article is based on Bernard Baruch’s memoir, My Own Story.)

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