We are coming to the end of two long and arduous years of investing. Along the way we have endured one of the worst selloffs and rebounds in stock market history, a systemic breakdown of the global financial system, and volatility not seen since the 1987 stock market crash. Fortunes have been made and lost. Investor confidence was shaken and very much stirred.
Very few people sold at the top in 2007 and then bought the bottom in 2009; some did manage to do one of those two things. Some bought the top and sold the bottom; most performed somewhere in between.
Now it's time to measure individual performance and prepare to move on to 2010. Naturally, we'll cling to some age-old trading and investment maxims, which are often the root of common faux pas made by bulls and bears, traders and investors, equity and fixed-income types.
Much of the following is presented in a tongue-in-cheek manner, but paying careful attention to this list also might help us to learn from our mistakes. So without further ado, here is my list of the five greatest lies of investing:
1. It Will Come Back
I can't tell you how many times one of my new clients at
LakeView Asset Management
will present me an existing portfolio that contains a stock with a long-term unrealized loss. When I explain to the client that we should liquidate the position, I sometimes get the response: "It will come back."
Quite often this statement is made out of emotion, nostalgia or hope. There is a chance that at some future date,
will once again come back. That does not mean that we should hold on to those stocks. There are plenty of other opportunities.
2. It's a Low-Volume Rally
So many people have missed the rally in its entirety or in part since the Devil's Bottom, when the
hit 666 in March. Here's a common excuse I hear all the time: "I did not participate because it is a low-volume rally."
Talk about rationalizing a mistake. A rally is a rally is a rally. The IRS, your bank or your family could care less if you make money in a low-volume rally or a high-volume rally. Does it matter if you score a touchdown on a five-yard run or a 95-yard pass? Both put six points up on the scoreboard. So if you spot opportunities in the market, take advantage of them. If you can't be opportunistic, then don't blame it on the volume, because whoever did produce that volume did benefit.
3. Bonds Are Safe; Stocks Are Risky
If you believe that bonds are safe and stocks are risky, then you must believe in the Easter Bunny. I have news for you: Companies can default on bonds. You can lose your entire investment in bonds. If you don't think so, ask anyone who held
Some bonds are safer than others. Some stocks are safer than others. Some stocks are safer than certain bonds. That is why we have credit ratings and credit spreads in the bond market. Furthermore, liquidity for stocks can be much better than liquidity for the same company's debt.
4. Mutual Funds and ETFs Give Me Diversified Exposure
"Diversification" is a very subjective term. You must first define what index or asset class you are diversifying against. Second, you have to worry about single stock concentration. Perhaps you don't really care. It really is a matter of choice and risk aversion, but you need to know the profile of the fund that you own.
For example, take the CGM Focus Fund (CGMFX). Its top 10 holdings represent 68.34% of the mutual fund's assets. These 10 holdings vary in weighting from 5.64% to 9.43%. There are three investment banks/money-center banks in the top 10 -- Goldman Sachs (GS) - Get Report, JPMorgan (JPM) - Get Report and Morgan Stanley (MS) - Get Report -- totaling 21.54% of the fund. Finally, the beta of the fund relative to the S&P 500 is 1.15.
Clearly one has to wonder if this fund is diversified or if there is concentrated risk.
5. Size Matters
All too many investors confuse best-of-breed with biggest-of-breed. There is a significant difference. Jim Cramer talks about best-of-breed on "Mad Money" and
writes about it in his books
. Investopedia defines it as follows: "A stock that represents the most optimal investment choice for a specific sector or industry due to its high quality compared to its competitors." The biggest of breed is simply the largest company in the industry, which does not necessarily mean the best of breed, nor does the biggest in breed offer the same growth or opportunity that the best in breed does.
For example, take a look at
. Microsoft has a market cap of $268 billion, while Apple has a market cap of $188 billion. But Apple has a five-year earnings and revenue growth track record, which far exceeds that of Microsoft. Apple is best in breed, and I prefer it for the future.
At the time of publication, Rothbort was long Apple and Goldman Sachs, although positions can change at any time.
Scott Rothbort has over 25 years of experience in the financial services industry. He is the Founder and President of
, a registered investment advisor specializing in customized separate account management for high net worth individuals. In addition, he is the founder of
, an educational social networking site; and, publisher of
. Rothbort is also a Term Professor of Finance at Seton Hall University's Stillman School of Business, where he teaches courses in finance and economics. He is the Chief Market Strategist for The Stillman School of Business and the co-supervisor of the Center for Securities Trading and Analysis.
Mr. Rothbort is a regular contributor to
TheStreet.com's RealMoney Silver
website and has frequently appeared as a professional guest on
Fox Business Network
and local television. As an expert in the field of derivatives and exchange-traded funds (ETFs), he frequently speaks at industry conferences. He is an ETF advisory board member for the Information Management Network, a global organizer of institutional finance and investment conferences. In addition, he is widely quoted in interviews in the printed press and on the internet.
Mr. Rothbort founded LakeView Asset Management in 2002. Prior to that, since 1991, he worked at Merrill Lynch, where he held a wide variety of senior-level management positions, including Business Director for the Global Equity Derivative Department, Global Director for Equity Swaps Trading and Risk Management, and Director for secured funding and collateral management for the Global Capital Markets Group and Corporate Treasury. Prior to working at Merrill Lynch, within the financial services industry, he worked for County Nat West Securities and Morgan Stanley, where he had international assignments in Tokyo, Hong Kong and London. He began his career working at Price Waterhouse from 1982 to 1984.
Mr. Rothbort received an M.B.A., majoring in Finance and International Business from the Stern School of Business, New York University, in 1992, and a B.Sc. in Economics, majoring in Accounting, from the Wharton School of Business, University of Pennsylvania, in 1982. He is also a graduate of the prestigious Stuyvesant High School in New York City. Mr. Rothbort is married to Layni Horowitz Rothbort, a real estate attorney, and together they have five children.