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Who are the investors that sagely said, “It takes courage to be a pig” and “Risk comes from not knowing what you’re doing”?

These and hundreds of other witticisms, most related to risk management, pack “Applied Wisdom: 700 Witticisms to Save Your Assets” (Radius Book Group, Nov. 16), a new book by Alexander M. Ineichen, a chartered financial analyst and 33-year veteran of the financial services industry.

In an interview with ThinkAdvisor, the founder of Ineichen Research and Management discusses a dozen witticisms found in his amusing, illuminating book.

These observations, made by VIPs as different as Confucius and Jerry Seinfeld, are typically profound, sometimes politically incorrect and often simply saucy.

Here are two examples about success: “Buy when the cannons are thundering and sell when the violins are playing” (banker N.R. Rothschild).

“Rise early, work hard, strike oil.” John Paul Getty called that his “formula for success.”

Ineichen, who founded his Swiss-based independent research firm in 2009, focuses on risk management and nowcasting. 

The latter, he says, “replaces the guesswork of forecasting” and is “the basis of a robust decision-making process.”

He started out in derivatives brokerage and risk management products at Swiss Bank Corp. in 1988. He was with UBS in Zurich and London from 1990 to 2009. In 2000, he wrote the widely read white paper “In Search of Alpha,” and in 2001, “The Search for Alpha Continues.”

Much of the wit and wisdom in his book — Ineichen has been collecting quips for 35 years — concerns the benefits of contrarianism in investing and the advice not to blindly follow the crowd.

ThinkAdvisor recently interviewed Ineichen, a chartered alternative investment analyst as well, who was phoning from Zug, Switzerland.

Read on to pick up pearls of risk-management wisdom from the likes of Cicero and Peter Lynch, and to find out who originated the pithy quotes at the top of this article.

Here are highlights of our conversation:

THINKADVISOR: How can the witticisms in your book help financial advisors? 

ALEXANDER INEINCHEN: They contain a lot of summarized knowledge from the past. Often financial theory takes that wisdom and mathematizes it. 

When you apply the wisdom to finance and risk management, in particular, it’s helpful.

Let’s talk about 12 of the witticisms you’ve written about. First, this one from Warren Buffett: “Successful investing requires a quality of temperament, not a high IQ. You need an IQ of 125 tops, and you must be able to think for yourself.” 

I don’t know whether the 125 measurement is correct, but there’s a concept from psychology suggesting that extremely smart people, especially book-smart people, can actually make pretty bad mistakes by, sort of, missing what’s going on in the real world.

The first part of the quote is a reference to that: You need a certain attitude and to be analytical. 

The second part refers to the contrarian idea that you have to be able to think on your own, which means you can’t always just follow what everyone else does.

If you do that, you’ll have the performance of average investors. But you want to be better than the average investor. That means you need to think for yourself and do something different when a storm comes up.

Buffett also said, “Risk comes from not knowing what you’re doing.” 

Ignorance of ignorance and hubris are also just as dangerous.

Here’s one from British economist John Maynard Keynes: “When circumstances change, I change my mind. What do you do?”

He said that if you spot a change, you have to change your investment hypothesis. But until the day when and if the circumstances change, leave the positions in your portfolio as is.

Keynes said too: “If you really want to buy something cheap, you can’t wait until the market loves it.” 

A good example is energy stocks a year ago. They were so hated because everyone was focused on green and clean energy. The market neglected those stocks, but then you had such a strong rebound over the past 12 months.

From famed Magellan Fund manager Peter Lynch: 

“Never invest in an idea you can’t illustrate with a crayon.”

The idea here is to keep it simple. It’s the concept that you need to understand what you’re investing in. 

Albert Einstein said, “If you can’t explain it to a [6-year-old], you don’t understand it fully.”

Here’s a quote from N.M. Rothschild, the German banker (1777-1836): “I buy when the cannons are thundering and sell when the violins are playing.”

That’s one of my favorites. In fact, I used that quote earlier today in a presentation. 

When things are good, it’s time to sell — not when things are really bad.

The last great buying opportunity was at the end of March [to] the beginning of April 2020. That was when the cannons were thundering because of the coronavirus lockdown. Volatility spiked. 

But now volatility is very low, and we’re in the opposite situation. Now the violins are playing.

This is a dangerous situation. If everyone is bullish, they’ve already positioned themselves on the buy side, whereas when fear is greater, everyone sells like mad.

And that’s when opportunity arrives.

More on this topic

Now we’re at the opposite end of the cannon.

What did hedge fund manager Stanley Druckenmiller mean when he said “It takes courage to be a pig”?

It ties into the idea of being a contrarian. An example would be banks. Since the financial crisis more than 10 years ago, banks have been neglected. 

Then they reached the point when they were cheap. This year, I think [financial] was the second-strongest sector.

When you buy something when everyone hates it, you’re a bit of a pig because people think it’s “dirty” since it’s been neglected.

Finance professor and behavioral finance pioneer Meir Statman said: “The market may be crazy, but that doesn’t make you a psychiatrist.”

This means that we know the market can be crazy, but that doesn’t necessarily [signal that] you can benefit from it. It’s still difficult. 

And even if we were like Mr. Spock [“Star Trek’s” super-logical character], it doesn’t mean you can know that next move of the mob — the crowd, the crazy investors, so to speak.

“The majority is always in the wrong. Whenever you find you’re on the side of the majority, it’s time to reform or pause and reflect,” Mark Twain said.

Again, it’s the idea that you need to be a contrarian. Mark Twain actually went bankrupt, so he wasn’t that great an investor.

And like many quotes, this one isn’t literally true. Sometimes you do want to go with the crowd: For the past 10 years, you didn’t want to be fighting the trend because you would have been on the wrong side of things.

But often, when star managers are celebrated at the end of their career, it [turns out] they’ve been doing something different.

Cicero, Roman politician and philosopher (106-43 B.C.), said: “Probability is the very guide of life.”

Some of the concepts that apply to finance today are thousands of years old. That’s why I like quoting ancient figures.  

Because the future hasn’t yet been written, it’s good to have a probabilistic approach. There’s a probability for nearly everything [as Cicero said].

For example, there’s a probability that interest rates really go up for the long term, and the industrialized world economies get into trouble because of the amount of debt. 

But there’s also a probability that interest rates will stay low for the next two years.

Gary Shilling, investment advisor and former physicist, said: “Financial markets can remain irrational for longer than you can remain solvent.”

Remember the Nasdaq bubble in the l990s? People were starting to become bearish in 1996, but the market went up year after year. So if you had shorted those stocks, you would have gone bankrupt before you were proven right. 

If you overintellectualize and are arrogant and think you’re right and the market is wrong, that’s very dangerous. 

That’s why Shilling says the markets can be weird or go in one direction much longer than you can remain solvent.

Bambi’s mother to Bambi in Disney’s book adaptation: “It seems long, but it won’t last forever.”

She was referring to the long winter. So if you’re in a bear market, like the long one from 2000 to 2003, you could quote Bambi’s mother. You know that something bad will end, but you don’t know exactly when.

Let’s turn to the subject of nowcasting, an alternative to forecasting. It’s a focus of yours. You write that “nowcasting is to forecasting what astronomy is to astrology.” Please explain.

It comes from weather science, and it applies to finance. For instance, if interest rates are going down, it’s better to assume that the trend continues rather than look out the window and make a fancy prediction — because you can’t predict the day they’ll [rise].

What’s wrong with forecasting?

In the past 10 or 20 years, a lot of research has been done on how certain systems cannot be forecast, such as chaotic systems.

But scientists will make their forecasts because they have to for political reasons, and economists working for banks also need to do forecasts because their clients require them.

But it makes no sense. Markets are chaotic, and chaotic means a small disturbance can have a large impact.

Last year is a good example because something small changed everything: the coronavirus.

By the end of February 2020, everyone knew that all the forecasts for 2020 were unusable because something small had changed everything.

What are you nowcasting at this moment?

The Western world is doing well economically. We’ve had an extraordinary rebound since March 2020. The economies got a kick-start, but that phase ended in late summer.

China is ahead of the curve because they went into lockdown earlier, but they also [ended it] earlier. They’ve had a bit of a cooling-off period for the past half-year.

So the world has been lagging China by, perhaps, a quarter or two.

My nowcasting is suggesting that the capitalist world is going in that same direction [as China].

So the situation is good, but worsening. It’s not improving anymore.