The stock market isn’t everybody’s cup of tea, and the primary interest of investment shouldn’t be money, Neuberger used to say. “Investors should be simply intensely interested in what they are doing, and success will follow,” he said.
“The stock market is like a large, treacherous ocean, with tides moving in and out. Market waves are less frequent than the ocean, but they are more erratic. Even the strongest swimmer must carefully time the advances and retreats. Like swimming in the ocean, investing in the market is not for everyone,” he wrote in his book
So Far, So Good – The First 94 Years.
Neuberger said some investors often get into trouble when they do not have the desire to learn and want to just get rich quickly. “Small investors who get into trouble, I think, are those who try to get rich quickly. They are in and out of the market in a flash and do not take the time to learn. That’s a dangerous game,” he said.
Roy R Neuberger was an investment legend and an art patron. He began working on Wall Street in early 1929, and is known for surviving the market crash of that period by short selling the RCA stock and keeping investment losses to the minimum. In 1939, he co-founded brokerage and investment firm Neuberger Berman with Robert B Berman, and continued to go to his office every day until he was 99.
He also became a committed art collector in the 1930s and applied his investment skills to that asset class as well.
In his autobiography, Neuberger shared his investment wisdom and outlined ‘Ten Principles of Successful Investing,’ which he felt can help young investors in their investment journey.
Let’s take a look at these tips from this great legend.
1. Know Thyself: Neuberger says investors should study themselves even before they start studying companies for investment, as their personal strengths can help determine their success as investors.
“Examine your own temperament. Are you by nature very speculative? Or are you uncomfortable taking risks? Be 100 per cent honest with yourself in answering this question. You must be able to make calm judgments. Calm does not mean being slow. It means taking careful decisions based on solid knowledge. Sometimes a move must be made fast. Usually, if you have done your homework, quick decision making won’t be a problem,” he said.
Neuberger said if investors recognise that they have made a mistake, then they should get out of that trade as quickly as possible.
“Success in investing is based on applying knowledge and experience. It is a good idea to specialise and invest in areas in which you already have specific knowledge. If you know nothing about an area and haven’t studied the companies and the sector, stay away from it.” he said.
2. Study the great investors: Neuberger says that even the most outstanding investors of the past have been through difficult times and have made mistakes in their careers.
They have learnt from these mistakes and applied those lessons to the market at crucial times. He said there are two broad theories of investing in the market: growth and value.
Neuberger says by looking at the careers of great investors, one can figure out many different, often contradictory, ways to succeed in the market.
“T Rowe Price succeeded by appreciating the importance of the growth of new industries. Ben Graham did it by understanding the basic values. Warren Buffett did it by elaborating on the lessons he learned from Ben Graham, his teacher at Columbia University. George Soros did it by relating a thoughtful philosophy to international finance. Jimmy Rogers did it by discovering the defence industry stocks and by passing along ideas and analysing it to his boss, George Soros. Each has been highly successful in his own way,” he said.
3. Beware of the sheep market: Neuberger says investors should have the desire to learn from the great investors, but they should not follow them. “You can benefit from their mistakes and successes, and you can adapt to what fits your temperament and circumstances. But your resources and your needs are bound to be different from anyone you may want to emulate,” he said.
Neuberger says most investors have the knack of blindly following a positive or negative statements coming from analysts knowledgeable in certain securities or if an opinion is given by one key player, whom they probably don’t even know.
This, he said, leads to the market responding violently which is a momentary glitch as it doesn’t continue for long and usually it just happens that day. “One individual comments on a stock, and it moves up or down 10 per cent. That could not be called a real bull market or bear market. I call it a ‘sheep market’, he said.
Neuberger felt the ‘sheep market’ can be compared with the fashion industry. “When a great couturier makes a new style of dress or suit, the minor designers copy it. If the hem lines on a dress go up or down, millions of people follow the fashion. That is a sheep market,” he said.
He said it is important for investors to not underestimate the importance of psychology in the stock market. When investors buy, they are more anxious to buy than the seller is to sell, and vice versa.
“In the sheep market, people try to guess what the crowd will do, believing they can be swept along in a favourable current. That can be dangerous. The crowd may be very late in acting. Suppose it’s an institutional crowd. Sometimes they overinfluence each other and are the victims of their own habits,” he said.
Neuberger says sheep investors are very susceptible to suggestion. So, he advised investors to do their own research and choose stocks on their merit rather than taking tips that they really can’t verify.
Keep a long-term perspective: Neuberger says investors often made the mistake of focusing on short-term earnings and ignoring the significance of longer trends. “A sizable part of the Wall Street community appears to be obsessed with finding out what is happening to corporate earnings from minute to minute. The greatest game among a number of research firms today seems to be to determine next quarter’s earnings before someone else does,” he said.
He said the gains in earnings should be the result of long-term strategies, proper management, and good exploitation of opportunities.
He said if a very popular company underperforms in a quarter, then investors tend to panic, causing the stock price to drop. So, he felt investors should keep a long-term perspective in investing which can keep them from being diverted by fads.
“The criteria for purchase of any substantial amount of stock should remain on solid grounds that stand the test of time: 1) a good product; 2) a necessary product; 3) honest, effective management; and 4) honest reporting,” he said.
5. Get in and out in time: Neuberger says figuring out when it is a good time to get into the market and when is it a good time to get out and stay out is very crucial for investment success. “What looks like the best long-term investment can be terrible if you buy at the wrong time. And sometimes you can make money in highly speculative stocks by buying at the right moment. The very best securities analysts can do well without following market trends, but it’s a lot easier to work with the trends,” he said.
Neuberger said investors are often successful when they are willing to commit a lot of money on the ‘buy’ side when the market is weak. On the other hand, investors create the eventual buying power by having the common sense to sell in a strong market, liquidating comparatively few securities for high prices.
“Correct timing is partly intuitive, partly contrary. Timing requires independence in thinking. Uptrends can occur during business-cycle downtrends, and declines can come in periods of full prosperity,” he said.
6. Analyze the companies closely: Neuberger said it is important for investors to study the company’s management, the leaders, their track records, and their goals. He said it can be beneficial for investors to check the company’s real assets and the cash behind each share.
Also, he felt knowing about a company’s dividends are an important plus. “If a company’s dividend is safe, it helps put a floor on the price. Check into the company’s payout policy. If it pays out 90 per cent of its earnings, beware – it’s usually a danger signal of a dividend cut ahead. If a company is paying out as little as 10 per cent, that is also a warning. The average company pays out 40 to 60 per cent of earnings as dividends. Most utility companies are more generous,” he said.
7. Don’t fall in love with a particular stock: Neuberger says investors should avoid falling in love with a particular security as it is just a sheet of paper, indicating a part ownership in a corporation. “I learned early in my career to be skeptical and flexible, not stubborn, about a stock. I also learned to take quick, small losses rather than to get emotionally involved in a stock that was dragging me down. When I am wrong about a security, I try to take my loss at the 10 per cent level. In other words, it’s all right to be in love with a security – until it gets overvalued. Then let somebody else fall in love,” he said.
8. Diversify, but don’t hedge alone
Neuberger says hedging was a very difficult procedure and investors should be careful while using this technique. “Hedging – going long on some stocks and short on others – saved most of my resources in 1929, but I do not recommend it. You could lose your resources trying it. You run a big risk of losing on both the long and the short,” he said.
But he felt if investors are adamant to use the hedging technique and have experienced professionals helping them out, then they should make sure that it is accompanied by reasonable diversification.
“Be comprehensive in your outlook: Make sure that some of your principal is kept safe, try to increase your income as well as your capital, and diversify your investments,” he said.
9. Watch the environment: Neuberger says investors should keep an eye on the general market trend as well as the world outside the market, so that they can adapt themselves to the current market scenarios in which they are operating.
10. Don’t follow the rules: The investing legend also believed that investors need to be flexible and make investment decisions according to the economic, political and technological changes occurring in the market. He felt it is natural for investors to be willing to change their thoughts to meet new conditions.
“Don’t do exactly what I do. If you do, you will go crazy. You have to dig yourself, just as I do. Wall Street is a wonderful, exciting game,” he said.
(Disclaimer: This article is based on Roy Neuberger
‘s book So Far, So Good – The First 94 Years.