Editor's note: This is the continuation of a special collection of previously published investing lessons from RealMoney contributor and market strategist Barry Ritholtz.
Has this ever happened to you? You've been waiting to deploy some fresh
capital. You've done your homework -- checked the
charts, looked over the
fundamentals. You are ready to make a buy.
But moments before you pull the trigger, someone casually mentions something negative about this new target. It could be a coworker or some talking head on TV. Regardless, you hesitate, decide to do some more research, just to be sure... and the next thing you know, your stock pick is off to the races -- without you.
All you can think is,
thanks for nothing, buddy.
Apprenticed Investor: 6 Investor Types to Avoid
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We've all had chance encounters like this. They can cause self-doubt, make you second-guess yourself, wreak havoc with an investment strategy.
There are two solutions to dealing with this kind of distraction: One is to become more confident in your own skills. This will occur as you continually educate yourself, which is what "
The Apprenticed Investor" is all about. The more confidence you develop, the easier it is to stick to your investment plan and not let third parties bump you off track.
The other solution is simpler: Learn to recognize destructive investor personalities -- and stay as far away from them as possible.
Last week, we discussed why gains and losses are ultimately the
investor's responsibility. But there are some people who can temporarily knock you off your game: These are people to avoid.
The Dirty Half-Dozen
The Enthusiast: He's always breathless; his companies are always on the verge. "Big news is due any day now." There's always someone about to "snap these guys up." He's entranced with new management, i.e., "The new CFO was employee No. 12 at Dell !".
At one time or another, we've all been bitten by the infectious salesmanship of the enthusiast. The story always sounds great... yet somehow, the stocks never seem to work out.
The Tipster: The easiest of all the archetypes to recognize, this guy always has a hot story that simply cannot wait. It's about to happen any minute -- a deal to be announced or an imminent takeover.
While the "enthusiast" is all excited about the company, what gets the tipster jazzed is the source of info. "This guy I know is (choose one) head trader at a
hedge fund/runs a major wire house desk/at the FDA/on the board of directors."
In 2004, biotech was hot and the tipster talked a lot about new drugs that were just about to get FDA approval (none worked out).
In 2005, the tipster
was been big into government and military contracts; apparently, he gets to brunch with Donald Rumsfeld.
For a person who supposedly has information that -- if true, is likely illegal -- the tipster's trading record is surprisingly bad. With all of his connections and illicit info, it turns out that the tipster is little more than a rumor monger -- and one who's usually late to the party at that.
The Liar: Most industries have their fair share of B.S. artists. But there is a very special type of liar attracted to trading.
You know these guys; they never seem to have a losing trade. When they discuss their executions, they consistently manage to buy at the low tick of the day. When they sell, their executions invariably are the very best possible print -- and on almost every sale.
Think about how often you've managed to get the very best print of the year -- or even the day. Over the past decade, I can count on one hand the number of times I've top-ticked stocks on the way out:
. Meanwhile, I've had countless sells at the day's low print.
Somehow, the liar manages to accomplish a decade worth of statistically aberrant prices each day,
I never call these clowns out. Why show your hand? But I make a mental note who the liar is, and judge all future statements accordingly. You should do the same thing.
The Permabull or Permabear: Among the most dangerous and costly clowns in the circus, these guys are responsible for more destruction of wealth than any other player.
You doubtless recall the permabulls from the late 1990s. Most are little more than slick salesmen. They do not do much in the way of original research, but you can imagine the inner workings of their minds, sifting through reports looking for just the right bullet points.
The permabull uses all of the right buzzwords, his patter is polished, his manner impeccable. By the time he's done with his bullish sales pitch, you're reaching for your checkbook -- and historically, big trouble.
Some of the permabulls used to be on TV a lot. One in particular was a frequent TV guest, extolling the virtues of the Goldilocks economy and the ever-rising bull market at
5000. Then the bottom fell out, taking the Nasdaq down a mere 80%. He never changed his tune the entire way down.
On the flip side are the permabears, of which there a few classic examples. They've been bearish for as far back as I can remember. They may have avoided the drop from
11,000 to 8,000, but they've been waiting for that drop ever since Dow 3,000.
Avoid these broken clocks like the plague.
The Exotician: The more obscure, the better: that's the motto of this creature.
Fascinated by exotic charts and little known indicators, the exotician changes methodologies as often as he changes his underwear.
Flitting from style to style like a butterfly, his enthusiasm for the esoteric merely masks the lack of conviction he holds for his previous theory.
Last week it was a combination Bollinger Bands and McClennan Oscillators. Before that it was Elliot Waves. This week, its MACD and Fibonnaci. Next month, it's the Kondratiev Long Wave theorem.
It's not that these techniques don't have value, but the exotician simply can't seem to stick with any one long enough to test their validity. The exotician is on a futile search for the magic elixir -- which, unfortunately, does not exist.
The Know-It-All: I love listening to people talk about stocks at cocktail parties. One of my favorite players is the guy who knows all the obscure details on a company: When they were formed, who sits on the board, the model numbers of new products, all sort of useless minutia. At his fingertips is an unholy checklist of data, all of which is completely irrelevant to the investment process.
This is especially true with tech companies. Their products are complex and ever-changing; the networks they sell into are even more complicated. The technical attributes of their products are way beyond the comprehension of the average investor whose VCR clock has been flashing "12:00" since 1994.
Actual language overheard at a barbecue
in the summer of 2004: "Wait till you see the new 2200 dynamic cross circuitry router -- it's going to kick
Now, I'm pretty tech savvy: I hooked up my own
, and I can swap out a hard drive or add RAM by myself. But comparing the technical attributes of high-end switching equipment, and then doing a cost benefit analysis of the technical advantages of that product line (relative to the rest of the marketplace for that equipment) is far beyond my expertise.
I'll wager it's beyond your ken also.
Be wary of these characters. They remind me of the kid in grade school who couldn't hit, throw or field, but he memorized the stats of all the players on his favorite baseball team.
Folks like that often lack an appreciation for the game. It's no different with investing.
This column was originally published on April 19, 2005.
Barry Ritholtz is the chief market strategist for Ritholtz Research, an independent institutional research firm, specializing in the analysis of macroeconomic trends and the capital markets. The firm's variant perspectives are applied to the fixed income, equity and commodity markets, both domestically and internationally. Other areas of research coverage also include consumer, real estate, geopolitics, technology and digital media. Ritholtz is also president of Ritholtz Capital Partners (RCP), a New York based hedge fund. RCP is driven by the analysis performed by Ritholtz Research. Ritholtz appreciates your feedback;
click here to send him an email.