Here's why Murphy's law should be a crucial consideration for investors like you…
Each Wednesday, we publish articles about basic investment tips, strategies, and insights because we believe this will enable you to make the right decisions in terms of your finances. Today, we’ll talk about advice that will help you kickstart your journey towards achieving financial freedom. Ready to learn more? Keep reading below to understand why preparing for the worst can make you one of the best investors out there.
|
||
|
Here's why Murphy's law should be a crucial consideration for investors like you… Are you familiar with Murphy’s law? Basically, this is an adage or epigram that is typically stated as: “Anything that can go wrong will go wrong.” In some other variations, Murphy’s law is extended to mean that: “Anything that can go wrong will go wrong, and at the worst possible time.” Edward Murphy Jr. was the genius behind this idea… Murphy Jr. and His Rocket-Sled Experiment Murphy was an American aerospace engineer who worked on safety-critical systems and a U.S. Air Force captain in the 1940s. After World War II, he was assigned to test how G-forces affect the human body, and so he planned an elaborate test at the Edwards Air Force Base in California. [G-forces: This pertains to the force of gravity or acceleration on a body.] The test involved strapping a soldier to a sled mounted by rockets to accelerate the vehicle beyond 200 mph. The sled was called “Gee Whiz.” Everything was set to go in the experiment. The project’s commander, Lieutenant Colonel John Stapp, volunteered to strap in. An assistant wired four sensors to his shoulder straps to measure the G-forces. Guess what? The experiment went perfectly… until it yielded no data. Not one of the sensors picked anything up! How was that possible? Murphy took a closer look and realized all four sensors were wired backwards, rendering them useless. Frustrated, he exclaimed, “If there’s any way these guys can do it wrong, they will.” Over time, Murphy’s irritated observation morphed into what’s now known as Murphy’s law. Professor Joel Litman, Chairman and CEO of Valens Research and Chief Investment Strategist of Altimetry Financial Research, says in a volatile market, Murphy’s law should be a crucial consideration for investors like you. As we’ll explain today, the same lessons that keep projects running smoothly can also keep your investment portfolio on the right track. How Preparing for the Worst and Murphy’s Law Can Make You a Better Investor There are LOTS of factors working against you in investing. One of the most obvious is the emotional urge to buy high and sell low. According to Professor Litman, it’s human nature to worry when your investments go down. In fact, fear and uncertainty tend to peak when the market hits a low—right when it’s the best time to buy. What else? You also have to contend with entities like hedge funds that have access to more information than you. For instance: Citadel is one of Robinhood Markets’ (HOOD) biggest customers. The company buys all of Robinhood’s user-trading data, and uses that to make better investing decisions. As an individual, it’s impossible to compete with such big guys in terms of information access… and there’s another big factor, though. It’s the reason why, since 2010, less than 50% of actively managed funds beat their benchmarks. In other words, they don’t consider what could go wrong. Professor Litman states good returns aren’t all about picking winners. They’re just as much about avoiding losers. Regular readers know Professor Litman and his team at Altimetry publish a quarterly “Do Not Buy List” for subscribers to the Microcap Confidential advisory. This list consists of stocks that have failed the team’s fundamental forensics checklist. The microcaps on the “Do Not Buy List” are the worst of the worst. By staying away from them, you can better prevent Murphy’s law from taking a foothold in your portfolio. Here’s a helpful exercise to make sure you feel confident in any investment decision… You may have heard about conducting a “post-mortem analysis” after closing a trade. Here, you’re basically looking at whether or not that activity worked out… and what you would do differently next time. The point is to examine what you got right and wrong—timing-wise, emotionally, and analytically —and use such insights to inform future decisions. That’s a great start! However, that doesn’t help you prevent the types of issues that crop up with Murphy’s law. So, what’s the solution? Doing a “pre-mortem analysis.” By this, we mean figuring out what could go wrong with your investment before you put your money in. Take “Do Not Buy List” stock Canoo (GOEV) as an example. Canoo calls itself an electric-vehicle (EV) maker. It went public at the perfect time—in late 2020, as the EV market was taking off.
Canoo sounded exciting on paper. The company claimed it was developing a subscription model for its EVs and that it already had a USD 1 billion sales pipeline of people who had put down deposits. Despite these lofty aspirations, it wasn’t hard to imagine what could go wrong for the company. After Professor Litman and his team ran through their fundamental forensics checklist, Canoo’s problems became even clearer.
As you can see on the photo above, Canoo triggered nearly all of Professor Litman and his team’s “Do Not Buy” warning signals. Canoo CEO Tony Aquila had a history of putting his own interests before shareholders’. His previous company, Solera, alleged that he ran off with Solera’s private jet to raise money for the future Canoo. What’s more? Between 2020 and 2021, Canoo reimbursed him for USD 2.3 million in air-travel expenses. That was only the tip of the iceberg. Professor Litman and his team were not surprised that the company’s stock went down 72% since they warned readers to stay away in September 2022. See? This is the sort of analysis you should do with every investment: “Before you put your money in.” It’s because a pre-mortem compels you to take a step back and double-check that you’re not investing emotionally. This ensures you’re not missing anything major that could blow up in your face, like investing in a fad right at the market top. Sure, reviewing a position after you close it is a good learning exercise. However, doing so before you invest is a critical capital-preservation strategy. Hope you’ve found this week’s insights interesting and helpful. One of the most sought-after outcomes of investors is owning stocks that outperform the market.. Learn more about this “vanilla” tool bank account for bonds in next week’s article! |
