Follow the Guru-Paved Road

To use a cliche, I see no purpose in reinventing the wheel. When something I want to do has been successfully done before, why should I try to create my own process?

That's the philosophy behind my approach to investing: People a lot smarter than me have studied investing, have tested their theories, have tweaked their approaches based on the results obtained, have tested their theories again, and have finally solidified their strategies into proven money winners.

Can You Pick Stocks Better Than Buffett or Lynch?

Think about it. What's the likelihood you, your buddy or your brother-in-law could create an investment strategy that substantially outperforms the strategies of such thinkers as Warren Buffett, Peter Lynch, William O'Neil or Benjamin Graham? In terms of the risk-reward ratio, it's not worth it. The reward is that maybe you could marginally outperform Warren Buffett (that's the assumption you make if you don't follow his strategy). But at what risk? It is far more likely you will fall far behind Buffett's performance if you try to invest on your own. The reward doesn't justify the risk.

Yet, many investors do try to devise their own investment strategies, or tweak approaches they've read about to fit their own opinions and assumptions. The truth is, most investors aren't very good at investing. I've seen figures suggesting that 95% of investors fail to exceed the returns of the S&P 500 over the long term. As they fall behind the market, they get increasingly frustrated, like a drowning person flailing at the water with greater and greater urgency.

This brings up another difficulty with trying to devise one's own investment strategy: It almost invariably encounters emotion, and emotion is the enemy of investing. It's easy to fall in love with a stock or an industry, and ignore all warnings that things aren't going well with what we have a crush on. Or, things start going badly for an investment and, almost immediately, we panic. We read about "the market" doing this or that, and like a member of a herd of buffalo heading for a cliff, we join the stampede, only to go over the cliff with everyone else (remember the Internet bubble?).

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John P. Reese is founder and CEO of Validea.com, an Internet investment research and stock analysis firm selected as one of Forbes Best 100 sites on the Web. He is also co-author of The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. At the time of publication, Reese did not have any positions in any of the stocks mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback and invites you to send it to [e-mail].

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