Investing in complex times: Is avoiding mistakes the most important strategy?

Befuddled about where to invest your money?

Maybe that shouldn’t be surprising. In the United States there are nearly 6,000 public companies that someone could invest in (never mind the rest of the world), and trying to find the shiny pearls in the midst of all that clutter is a grim task, said François Sicart, a wealth manager for over 50 years and author of “Luck Is Not Enough: The Life And Legacy Of A Successful Wealth Manager.”

That’s why it’s more important for investors – and the financial professionals who advise them – to focus on avoiding potential landmines rather than trying to pluck the extraordinary from the market’s foggy mist, he said.

“Instead of looking for the rare, outsized winners in the market, it’s more fruitful to eliminate those that we should avoid,” said Sicart, founding partner of Sicart Associates, LLC.

The kinds of companies on Sicart’s to-be-avoided list include those that are over indebted, illiquid, or that spread themselves too thin over diverse activities. He also suggests giving the cold shoulder to any companies involved in activities you don’t clearly understand.

Investors who know too little – and too much

Unfortunately, not every investor is savvy enough to avoid sinking their dollars into iffy propositions, and even some who should know better occasionally let themselves be lured into making questionable decisions, Sicart said.

“There are two main types of dangerous investors: those who are poorly educated or insufficiently informed and only invest on gut feelings, and those at the other extreme, who are overeducated and/or excessively intellectual,” he said. “The latter live under the assumption that there is nothing that they cannot understand and thus are easily seduced by challenging schemes or new products without applying basic cynicism and common sense.”

That’s how a surprising number of supposedly sophisticated professional investors were attracted to such notorious schemes as Enron or the Ponzi investment scheme organized by Bernie Madoff, Sicart said. More recently investors flocked to Theranos, the blood-testing company that later proved to be much less of a sure bet than advertised. Theranos’ founder, Elizabeth Holmes, was convicted of defrauding investors.

Weighing downsides without ignoring opportunities

Another shortcoming that affects investors who are looking for outstanding gains is they let themselves be overcome with optimism, Sicart said. They overestimate the potential gain from an investment and overlook any potential downside. Maybe those downsides involve changes in the company’s or industry’s fundamental environment. Perhaps the downsides are brought about by the entry into the company’s competitive space by disruptive technologies or new marketing or distribution approaches.

“Sometimes the downsides can’t be precisely anticipated, but a higher level of reflection can create an awareness of possible vulnerabilities,” he said.

But Sicart acknowledges that this can get tricky because, while it’s important to be skeptical and ponder the downsides of a potential investment, it’s also important to stay open to new opportunities. He said he’s been guilty himself of dismissing new offerings that turned out to be a more favorable situation than he imagined.

“I initially rejected buying the shares of Google and Amazon, for example, on the basis of their excessive valuations,” he said, “without fully recognizing how search engines would become indispensable to our lives or understanding that Amazon would evolve from an interesting experiment in bookselling to being the logistical master of the global retail business.”

In the investment world, nothing is certain, Sicart said, but investors can improve their odds if they learn from history, do their research and engage in some unbiased introspection.

About Francois Sicart

François Sicart (sicartassociates.com) is a founding partner of Sicart Associates, LLC, and author of “Luck Is Not Enough: The Life And Legacy Of A Successful Wealth Manager.” He has 52 years of experience managing individual clients’ accounts and their family affairs. Prior to starting Sicart Associates LLC in 2016, Sicart was the founder and chairman of Tocqueville Management Corporation, the general partner of Tocqueville Asset Management L.P.  Prior to founding Tocqueville Asset Management in 1985, Mr. Sicart was associated with Tucker Anthony, a New York investment firm. He received a bachelor’s degree from Lycee Carnot in Paris and attended the Ecole des Haute Etudes Commerciales, where he earned an MBA at the leading business school in France.