Editor's note: Arne Alsin's column runs exclusively on RealMoney.com; this is a special free look at his column. For a free trial subscription to RealMoney.com, click here. This article was published Jan. 17 on RealMoney.
This is Part 2 of Arne Alsin's two-part column on common investing sins. If you haven't already, please take a look at Part 1.
If you want to be a great investor, you have to avoid the big mistakes -- or sins -- that amateurs often make. Capital is too dear, too difficult to acquire in the first place to needlessly squander it in the markets because of avoidable mistakes.
Against a backdrop of sub-2% T-bills and certificates of deposit, and after two years of tough equity markets, it's hard to imagine a better time to get serious about investing. Many investors haven't made any money on a net basis for a few years running.
While I sometimes refer to the market as a game, in reality, it's anything but. The markets are ultra-competitive with sky-high stakes. Let's make another attempt, then, to become better investors by looking at more of the deadly sins of investing and how to avoid them. (Be sure to read
Part 1 of this two-part column to get filled in on the first four.)
- The sin of living in the past. We've had a number of speculative phases in the past 20 years -- in energy, real estate, gold, biotech, big-cap growth stocks and, most recently, technology and telecommunications.
Even though many investors refuse to give up, speculative booms always end the same way: A long period of exceptional performance is followed by a long period of underperformance.
Besides the obvious tech/telco excess lingering from the last cycle, investors should also be wary of big-cap growth stocks. I've made the case several times here that value is not to be found in the big-caps: in an
Aug. 9 column on the
Dow, in a
bearish piece on
Tyco and still
Making money was easy in the last cycle. In this one, it's more difficult, requiring work to uncover value in small- and mid-cap stocks.
The sin of thinking it's easy. Bull markets tend to breed a lot of hubris on the part of investors. I know that many investors rode the raging bull market into the year 2000, thinking they were smart. As those investors know now, making money in equities is anything but easy.
Even if you pick the right stocks, you can still lose in the stock market with poor money management. See
Part 1 of this column for a discussion of the formula for mediocrity: Commissions + Slippage + Taxes = Mediocrity.
Being a successful investor requires the right mix of patience, a workable methodology, discipline and moxie -- and that's required just to have a
chance to win.
There is no book, no secret formula and no system that will ensure success in the stock market. Nobody has all of the answers. Find something that works. For me, it's getting down and dirty in a stack of financial statements each and every day. I'm constantly learning, obsessively trying to uncover that next gem that I can saddle up and ride for a while.
The sin of following the crowd. Following the wisdom of the consensus is a one-way ticket to underperformance, without exception. It's natural and comforting to be part of a group. If you want to make money, though, do
as I said in a recent column: Get uncomfortable.
All of my stock picks are companies with problems, and they're unloved by the crowd. However, there's power in that dynamic. The average pick so far is way ahead of the
S&P 500 -- by 28%, on average.
The key here is that the market overreacts to the downside when problems arise at a company, and importantly, future company prospects are heavily discounted. This spells opportunity for the adroit investor.
The sin of emotional investing. Are you a serious investor? Then check your ego at the door. To the extent that your investing conversation is sprinkled with "I have a feeling" or "I just know," you're committing the sin of emotional investing.
Sometimes an emotional investor will get lucky -- but that luck could prove problematic because that same investor will begin to trust his or her instincts. As a result, "I have a feeling" could very well end up costing plenty.
Another example of emotional/ego-related investing is the fixation on the price paid for a stock. Investors wrestle with sell decisions based on how much they have invested -- but it shouldn't matter. The price paid is a sunk cost and should have no influence on the decision to buy more, sell or hold.
I also see amateurs let their emotions rule the day when the market is in a sharp upswing or downswing. Learn this simple mantra and repeat it when things are moving fast on Wall Street:The market is never as good as it seems (such as in 1999 and early 2000), and the market is never as bad as it seems (September 2001).
Arne Alsin is the founder and principal of Alsin Capital Management, an Oregon-based investment advisor specializing in turnaround situations. At time of publication, Alsin and/or ACM had no positions in any of the securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Alsin appreciates your feedback and invites you to send it to