How to Invest With Wit and Wisdom

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.