December 19th, 2013
by John Persinos, InvestingDaily.com
There’s an old expression: a fool and his money are soon parted. It makes one wonder, though, how a fool and his money got together in the first place.
You’ve heard of the “smart money.” Well, there’s also a syndrome that I like to call the dumb money. Below are common examples of investor obtuseness.
As 2013 draws to a close and we find ourselves on the cusp of a new year, make these six new year’s resolutions:
- Don’t jump into bull markets and bail out during market downturns.
There’s a natural allure to “up” markets, but the intoxicating effects of a bull market are not related to an investor’s need to have money rationally invested and allocated according to specific goals.
A bull market gets the animal spirits racing, clouding investors’ judgment. By the same token, a down market gets investors depressed, causing them to run away from undervalued bargains or to precipitously sell their investments at a loss.
The herd mentality is hard to resist; most investors behave like lemmings and march right off a cliff. They succumb to the “group think” of the media, friends, the Internet, colleagues, famlly—everyone telling them what stock or investment to buy, everyone ready with brilliant advice.
But here’s a general rule of thumb: Once your barber, cabbie or shoe shine guy starts giving you hot stock tips, it usually means the market has hit a peak.
Most investors do well in a bull market, but don’t mistake a bull market for brains. Be a contrarian investor. If the herd points in one direction, move in the other.
And the LAST thing you want to do is bail out of a down market, thereby locking in your losses. You’re usually better off waiting out a downturn, instead of panicking.
- Don’t abandon long-term investment goals and succumb to the urge to grab short-term profits.
There’s a difference between long-term net worth generated as a consequence of a methodical investment approach, and a greedy investor who just wants to grab the quick buck. The former has accumulated wealth over a sustained period of disciplined investing; the latter tends to benefit from random occurrence, as if playing in a casino.
Stay committed to your existing strategy. Sure, any strategy needs to be calibrated, according to changing market conditions. You should remain flexible.
That said, don’t hyperventilate over a sudden, short-term opportunity that contradicts your long-range plans. Create a strategy that’s right for you — and, despite the temporary vicissitudes of the market, stick to it.
- Don’t remain in thrall to your most recent experiences.
The investment adage—past returns are no guarantee of future performance — is all too often forgotten. Don’t dwell on past glories or defeats; stay forward-looking.
- Don’t spend insufficient time reviewing your portfolio.
Whether you’re an entrepreneur forging a business or an athlete preparing for an event, persistent dedication of money, time, and attention is needed to reach success. Those who infrequently review their investment strategy will get blindsided by constantly changing events. You can’t put your investments on automatic pilot. Review your investments at least once a quarter.
- Don’t take your eye off the big picture and micro-manage your portfolio.
Focus on the trends that will exert a significant impact on your investments; don’t lose sight of the forest by staring at the trees. Monitor economic and financial trends — the broader context of your investments — instead of getting caught up in day-to-day movements of the markets.
A big move in a stock, up or down, on a single day might seem at the time like a lot of money, but don’t lose perspective. Don’t blow out of proportion the ostensibly big developments that really are minor in the context of your long-term plans. Don’t churn your accounts with a lot of unnecessary buying and selling; you’ll rack up fees and lose your sense of balance. Invest your money — not your emotions.
- Don’t make decisions based on the commentary of financial pundits on TV who have an ax to grind.
Ideologues tend to occupy an echo chamber with those who share their beliefs. Through various media (especially television) these chattering “experts” wield undue influence. If you allow this cranial flatulence to sway your investment decisions, you’ll lose money.
Be forewarned, the preening prognosticators on what passes for “news” on cable television often disguise their ties to a political party or interest group. They tend to rely on cherry-picked or distorted data that promulgate an agenda.
These operatives are so enamored of their pre-conceived notions, they refuse to acknowledge any evidence to the contrary. Absent on their list of priorities is the well being of your portfolio.
The insatiable need of 24-hour financial channels for content virtually assures that anyone who can communicate at least a semblance of competence can get on the air. Unfortunately, there is virtually no follow-up on the advice conveyed.
Now, let’s get one thing clear: This website is neither liberal nor conservative. We shun any party labels that smack of red or blue — we represent only one color and that’s green. For our analysts, the underlying economic and business fundamentals trump all other considerations.
We follow the Jack Webb school of investing: “Just the facts, ma’am.” And by most empirical facts today, investors have plenty to cheer about in the coming new year. (For a compendium of recent and encouraging economic data, as well as a list of compelling stock recommendations for 2014, see my December 10 Investing Daily article, “How to Spot a Dying Bull”.)
In the final days of 2013, it’s apparent that the foundation remains in place for accelerating economic growth around the globe next year. In the meantime, we’ll continue to pinpoint the reasonably valued stocks of companies that produce essential products, boast solid balance sheets and dominate their respective niches. That’s a resolution that we always keep.