Academic research suggests that the investing public often achieves investment returns that are BELOW
the market return. This is interesting because the financial media and financial firms are relentless
in providing us with great investment ideas, stock tips of the day/week, defensive strategies, offensive
strategies, economic outlooks and the like. With all of this great advice it would seem certain that
turning an investment profit is easier now than ever before! Unfortunately, this is not the case.
Regardless of the year or what is going on in the economy, investors tend to make the same mistakes over and over. Let’s take a look at a few of them.
Stock Picking Stock picking is any attempt to buy or sell a security based upon some forecast or prediction about the stock’s future. Investors often attempt to pick stocks because they are looking for a “home run” trade. Unfortunately, most investors are unaware of the risks that they take on by only buying a few stocks (ie. Worldcom, Enron, Bear Stearns, Lehman Brothers, AIG, etc).
Further, investors tend to believe that they know something about the stock or the company that the rest of the investing public doesn’t already know. Of course, this is often not the case. Because company news moves almost instantaneously throughout the markets it is almost impossible to know something about the future of a stock or company that everyone else doesn’t already know (Remember Martha Stewart?). So the current price of a stock tends to have already taken into account all of the knowable and predictable information about the stock or company.
Regardless of the year or what is going on in the economy, investors tend to make the same mistakes over and over. Let’s take a look at a few of them.
Stock Picking Stock picking is any attempt to buy or sell a security based upon some forecast or prediction about the stock’s future. Investors often attempt to pick stocks because they are looking for a “home run” trade. Unfortunately, most investors are unaware of the risks that they take on by only buying a few stocks (ie. Worldcom, Enron, Bear Stearns, Lehman Brothers, AIG, etc).
Further, investors tend to believe that they know something about the stock or the company that the rest of the investing public doesn’t already know. Of course, this is often not the case. Because company news moves almost instantaneously throughout the markets it is almost impossible to know something about the future of a stock or company that everyone else doesn’t already know (Remember Martha Stewart?). So the current price of a stock tends to have already taken into account all of the knowable and predictable information about the stock or company.
Market Timing
Market timing is any attempt to alter your investment allocation based upon some forecast or prediction
about the future. The financial media would have us believe that they know, in advance, what the markets
are going to do. They believe that they can predict the future. If they could, then why did so many
investment managers lose billions of dollars in the .com bubble? The same investment firms that lead us
to believe that they could predict the future are some of the same firms that almost went bankrupt in the
mortgage crisis of 2007 and 2008 (Lehman Brothers, Bear Stearns, Merrill Lynch, Wachovia, UBS, AIG, etc.).
Didn’t they see this crisis coming? The reality is that no one can consistently predict the future. Any
attempt to do so is simply speculation.
Past Performance/Track Record Investing Past performance or track record investing is any attempt to make good investment purchases based upon an investment manager’s recent investment performance. Think about the Tech and S&P 500 run up of 1995 – 1999. These asset categories produced huge returns over that time period. As a result, when folks allocated their portfolios in 2000 they looked at the asset categories that had performed well above the market (Large US Growth, Technology, etc.) averages in 1995 – 1999. Further, investors got out of the asset categories that had performed relatively poorly over that same time period. Needless to say, when 2000 – 2002 rolled around all of those investors that used past performance as an investing strategy were really hurt. Because markets tend to run in cycles, recent investment performance has very little correlation with an investment manager’s ability to do well in the near future.
Past Performance/Track Record Investing Past performance or track record investing is any attempt to make good investment purchases based upon an investment manager’s recent investment performance. Think about the Tech and S&P 500 run up of 1995 – 1999. These asset categories produced huge returns over that time period. As a result, when folks allocated their portfolios in 2000 they looked at the asset categories that had performed well above the market (Large US Growth, Technology, etc.) averages in 1995 – 1999. Further, investors got out of the asset categories that had performed relatively poorly over that same time period. Needless to say, when 2000 – 2002 rolled around all of those investors that used past performance as an investing strategy were really hurt. Because markets tend to run in cycles, recent investment performance has very little correlation with an investment manager’s ability to do well in the near future.
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