Beating the Stock Market

December 27, 2021 |

Beating the Stock Market, by R. W. McNeel (1926), could have been written by Graham in 1950 and contains the worst advice for customers that could have been given 1000 years ago and is still being given today: "Stocks are to be bought at low price - and only by so doing can one make money." the idea is that when stocks are low, people get frightened and at these times they would not think of taking money out of their banks and buying stocks. the idea is to sell when stocks are high, get out of the market, wait for the inevitable decline and then get back in. This is almost like it was written by Alan Abelson and his current day followers except that even after the 1987 fall where stocks fell 30% to Dow 400 the former was still bearish and called the decline a start.

What are the problems with this approach? (1) the market is more bullish at a new high than at a new low. (2) the stocks that go up the most have a higher expectation than the stocks that are down the most. (3) the market has a 10,000 fold a century drift upwards and thus you can never never be successful if you get out and wait for the "inevitable drop". (4) growth stocks perform much better than value stocks.

Other bad advice in the book which reads like it was written today is never buy new flotations as Rockefeller and Morgan lost money. Rock and Morgan lost money when they didn't stick to their list and invested in railroads. New Haven and Colorado Fuel and Iron were their downfall.

all these counter to the terrible and destructive advice in the book and other uttered today in the media must be tested. I will endeavor to provide such tests here in the near future.

here's a more current version of McNeel but the original book that Alan Millhone gave me as present was written in 1926.

Vic's twitter feed

James Lackey writes:

My immediate question is why are these books sellable? We realized they get published because as Pam might say that’s what book sellers do. She’s one of the many book published experts on this list.

Perhaps Vic's advice which is granite rock solid is that it seems too easy! To be honest I thought that as a young spec. Now I realize this:

It’s hard to be bullish all the time.
Everyone calls us fools.
Then they point out our faults.

If we dare share logic and my goodness statistical data to prove why we are bullish all the time they weaponize our insecurities. The bears are smart and have very good arguments. They can be spiteful mean men. I’d be an old mean SOB too if I was wrong on average about everything.

Alex Castaldo adds:

It has been more than 25 years since I read this book in the reading room of the New York Public Library and I don't have a full recollection of it. I went to read it because it was mentioned in another book (or article) by Dean LeBaron and the library seemed to be the only place to find it. At the time I was reading as much as I could about investing, both recent works and what others considered "classics".

The main point of the book I thought was the importance of independent thinking in investment. The author points out that most people are like sheep and follow what they hear from others. A good investor should guard against this and try to come up with his own judgements. If I recall correctly the author coined the term "contrarian investing" to describe this. He explained that "contrarian investing" does not mean believing or doing the opposite of what everyone else does or believes. Rather it means doubting what others believe and being willing at times (but not all the time) to take a different position.

I did not dislike the book. I did think it perhaps a bit too obvious. If you are going to "outperform the market" almost by definition you have to do something different than what everyone else is doing. Also, it may be easier said than done. Some people, such as the Chair, seem to be good at coming up with their own opinions, but most people are somewhat conventional and it is not clear what they could do to change. Would just being aware of the need to think independently be enough?

I also thought the term contrarian does not seem the best choice for what McNeel is trying to describe. (It sounds like mulish opposition to what everyone believes). "Independent thinking" or the term coined by Michael Steinhardt "variant perception" seem more appropriate to me. But still it was interesting to see what the originator of the term thought it should mean.


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