Andre Kostolany died in 1999, but his memory lives on in the German-speaking world. He remains the stock market guru in Germany and his many insightful books are still available, but not in English. Kostolany was particularly renowned for his shrewd and astute mixture of psychology and his canny knowledge of stocks and markets. He was also a frequent guest on talk shows and his seminars were always sold out. (Read about other greats in our Greatest Investors Tutorial.)
Kostolany was a witty individual who was as famous for investing as he was for his pithy quotations, like this one: "Never run after a bus or a stock. Just be patient - the next one will come along for sure."
In his books, the charismatic Hungarian exile often referred to the alternating interplay between the group of cool, calm and collected investors on the one hand, and the edgy, panicky amateurs on the other.
Steady or Shaky Hands
Those with firm hands buy when the price is low. These people have both time and money, which also fosters strong nerves. The firm hands bide their time and they are not fazed by the ups and downs of the market and know exactly what they are doing. They make their move at just the right time, buying at the bottom and selling at the top, or at least pretty close.
When others sell in panic, desperation or simply because everyone else seems to be bailing out, they buy. The firm hands will then sell again at a massive profit when the market turns around again. (Learn more in Buy When There's Blood In The Streets.)
And to whom do they sell? To the shaky hands of course - the nervous small fry with their borrowed money and nasty cocktail comprising both a fear of losses, and of losing out on a boom. The shaky handers are anything but movers and shakers, tending to pile onto the freight car when the train has already left the station. They then jump off the runaway train in the middle of a crash.
Just Like a Casino
The steady hands are reminiscent of those of a croupier, who knows that he or she will be all right and that the house will win. The shaky hand is like the small town yokel who arrives in Las Vegas to make a killing, but whose nerves and bank balance are distinctly unsuitable for big stake poker. (For more, check out Going All-In: Comparing Investing And Gambling.)
Applying the Theory
Andre Kostolany knew just how to do this and made a fortune. Not only that, no one understood market psychology and the entire industry the way he did.
What this theory does is illuminate a basic principle of equity investing. It is really not for everyone, not the more speculative side, that is. Pretty much everyone should have a sensible proportion of their money in equities, but for the average Joe, just in some kind of fund, and no fancy speculation.
Only those with the right psychological make up and sufficient funds can really gamble and take chances. Only such people or organizations will operate with a steady hand, patience, tranquility and all those other things that make higher-risk investing successful. And this certainly includes a good technical and factual understanding of the stocks and markets themselves. It is not all about being cool.
In other words, self-insight is extremely important in the investment industry. It is necessary to know what you can handle nerve-wise, to understand your own mental limitation. And you need to know what you could actually lose on your investments and figure out it this is viable. If your hands are going to shake, then give it a miss.
Conversely, individuals with substantial resources and money, and particularly large organizations, are in a better position. However, even the biggest company is run by people, and has to take responsibility for what is done, in theory. So even if the money is there, the right mindset may not be.
Decades of astute observation led the old pro Andre Kostolany to divide active investors into two basic groups. The shaky hands are essentially greenhorn investors who just do not have the guts or the financial resources to invest well. They have the wrong psychology and lack the perseverance needed at crucial times to avoid taking massive losses in panic or out of financial necessity.
By contrast, the steady hands have the right mindset and enough money to develop a sound approach and strategy, and keep to it. Their aloofness, dispassionate rationality and experience, combined with adequate resources, allow them to succeed in the often hair-raising world of speculation.
Readers are advised to figure out just what kind of hands they have and, on that basis, speculate themselves or leave it to others. The stock market, and indeed any speculative or risky investments is not for everyone. This applies particularly to large proportions of your wealth, but even with smaller amounts, you need a firm hand and head if you are to do well and sleep well. All investors need to take some risk, but real gambling is not for the faint hearted - or should that be "faint handed"? (For more, read Is Your Investing Style Hot, Or Not?)