I’ve heard it said that investing is simple, but it’s not easy. I can tell you after all the years I’ve been at it that this is so.
For example, no one minds volatility when it’s on the upside. When stocks are going up, that’s volatility, right? But it’s positive volatility. The big test happens when the markets get ugly to the downside, and trust me, they always do. How you react when the market turns will determine your investment success or failure. Your emotions and instincts will be your worst enemy.
The feelings that are associated with bull and bear markets are easy to forget. It’s kind of like when you’re well, you can’t imagine ever getting sick again. And you forget how being sick really feels. But when you do get ill again—you remember. And when you’re sick you may wonder if you will ever be well again. You can forget how it feels to be healthy.
Your instincts can and will lead you to what I’ve identified as the three worst mistakes investors make. These mistakes are not only predictable, but the good news is they’re preventable.
Mistake Number One
Investors tend to chase results.
No one in their right mind would try to drive their car while looking only in the rearview mirror. But many investors persist in using this rearview mirror, so to speak, to try to get to their best investment destination.
Basically, everyone wants to be invested in whatever has been hot recently. Tech is where it’s at now. The S&P 500vtechnology sector has been up some 50% in past years. Who wouldn’t want a piece of that action?
Tech is just a recent example. Back in 1999, investments in emerging market index funds were up some 66% for the year. Investors then flocked to this asset class only to be treated to a 30% decline in 2000.
Remember, you can’t buy yesterday’s returns. They belong to somebody else.
Mistake Number Two
Investors overreact to short-term events.
Many investors let short-term events derail a good long-term investment strategy. Maybe you’re old enough to remember back in 1990 when Saddam Hussein invaded Kuwait. Many investors sold their stocks to wait-and-see how the war would progress. Bad move. The market took off and never looked back.
How about Y2K? A non-event if there ever was one. Still, many investors sold their stocks in 1999 just to be safe. Bad move.
I don’t know what the next crisis du jour will be. It’s probably something we can’t anticipate. But when it happens, how you react may determine when you retire and how well you’ll be able to retire.
Mistake Number Three
Investors try to predict the unpredictable
Many investors, with the help of Wall Street gurus, try to divine the short-term direction of the market and actually make investment decisions based on those forecasts.
Here are three predictions taken from New York Times headlines:
- Stock prices will stay at a high level for years to come, says Ohio economist
- Fisher sees stocks permanently high
- Mitchell asserts stocks are sound
The problem with these predictions is obvious when you find out they were all taken from the New York Times in October of 1929 just before the big crash.
Investment forecasts are designed to do just three things. And one of them is not to make you money. They improve TV ratings, sell books, and magazine subscriptions. It’s been said that there are two classes of market forecasters. Those who don’t know and those who don’t know that they don’t know.
I wonder if financial news programs would survive at all if we heard the following day in and day out.
So the announcer says: “Hey, Ken, you manage a lot of money and have been in the market for many years. What do you think the market is going to do next year?”
- Ken says: “Well, Charlie, I do not have, never have had, and never will have an opinion about where the stock market will be a year from now.
“Oh, come on, Ken, you must have some idea. What about interest rates and the economy?”
“Well, Charlie, once again I have no feelings for the direction of the market over the near-term and have no idea what interest rates or the economy will do.”
Now the announcer is getting a little frustrated wondering why his producer has booked this idiot.
So the announcer says, “What would you do?,” he asks emphatically.
“Well, I would ignore fluctuations. I would not try to outguess the stock market. I would buy a quality portfolio and hold on to it for a long long time.”
Plus Ken is probably thinking to himself: “And I would turn off this darn station!”
Obviously, these headlines wouldn’t play too well on CNBC or Fox Business. You won’t hear Cramer on Mad Money spouting this type of advice. Who in the world would offer such lame, uninteresting, and uninformative predictions, anyway?
Well, I can think of a few. There are three legendary investors I know that have espoused this for many, many years. One is Warren Buffett, of course; the second is John Templeton, one of the great value investors of our time; and Peter Lynch who ran the Fidelity Magellan Fund quite a number of years ago and had spectacular results.
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