Last week, we reviewed five of the top 10 things investors say and do that ultimately undermine their investing success. This week, we continue the process. (For part 1 of the story, click
here .) If you have ever said -- or even thought -- any of the following, you need to re-examine your investing philosophy:
6. 'This stock looks cheap down here.'Any time you hear this tidbit, you can bet that either 1) the stock just got killed because of some awful news, or 2) it's in the midst of a long and relentless downtrend. Don't confuse stock price with value. This was especially true in 2001 after all the prior splits. Sun Microsystems ( SUNW) is a perfect example. Monday's closing price of $3.89 may sound inexpensive, but don't forget the five splits between 1995 and 2000; back them out, and the stock is $124.48. Same $13.25 billion dollar cap, but it doesn't sound so cheap minus the splits. Of course, some stocks do actually get cheap "down here." But it has nothing to do with the numerical price.
7. 'This fund did great last year.'This is the flip side of "looks cheap down here." It comes up whenever someone is considering putting money into a mutual fund. It is the investing kiss of death. Studies have demonstrated that last year's hot fund is this year's loser. The prior year's performance is the single worst indicator of the next year's numbers. Some funds did well because their niche was hot that year. It could be a region -- last year, it was energy, a few years before that, Russia. Sometimes a sector is the flavor of the month. Defense was recently the darling of the moment. Funds that represent niches often outperform in some years and badly underperform in others, as the factors leading to their outperformance were aberrational and often unlikely to repeat. That's why chasing last year's news usually results in poor performance.
In September 2002, Bill Gross' ( PTTAX) Pimco Total Return bond fund passed the ( VFINX) Vanguard S&P 500 fund to become the biggest fund in the world. That was an example of investors piling into a "hot" sector and nailing the top of the bond market; it was also a month away from the bottom for equities. Avoiding funds that did great last year should not be confused with funds that did great "last decade." Good money managers consistently post good results, with low drawdowns and lowered volatility. These managers don't have the aberrational years when they are up and then down huge. Funds such as these are good places to put your managed money.
8. 'I'm a bull.' (or 'I'm a bear.')I never understood these dogmatic declarations; investing is not college -- you don't have to declare a major. Hypothetical question: Your get into your car to run some errands. Are you a "green" or a "red"? Do you make up your mind and simply drive through the next red signal, just because you are a green? Do you come to a dead stop -- regardless of the color of the signal -- because you're a "red"? It's a ridiculous question. You look at the color of the light and either step on the gas or the brake. The market is the same way -- when market sentiment, valuations and monetary policy are in your favor, you get long. When they are not, your portfolio should be more defensive.
9. 'I don't want to take a loss.'A variation of "I'm waiting for the stock to come back to break-even," but with a new added factor: self-delusion. Brace yourself for the bad news: You've already taken the loss. Just because you haven't yet sold, the position is irrelevant. A key to successful investing is being honest with yourself. By saying they don't want to take a loss, investors are not admitting two things. First, that they made a mistake; they bought something and it went down. Fess up to it.
Secondly -- and this is even more important -- losses are a part of investing. The best stock-picker in the universe buys stocks that go down. That doesn't matter; what does is whether you recognize that reality and have a plan in place to deal with it.
telecom universe for ideas I like, and then run these through my own discipline. I rely on far too many brilliant people to list them all. But I've tracked these sources for years, and I keep a log of every "tip" I get. I missed lots of opportunities doing so, but avoided even more dogs. When Doug Kass tried to steer me away from AOL a few years ago at $52, I didn't know his track record well enough to heed his advice. That was 35 points ago; fortunately, I got stopped out for "only" a $3 loss. Had I known this person better, I might have heeded the advice. But that's part of the game of investing...
10. 'I got a great stock tip.'Stock tips are the last refuge of equity scoundrels. It's lazy, irresponsible and just plain foolish. The plain truth is that the vast majority of "tips" are for horrific little stocks that don't have a snowball's chance in hell of ever amounting to anything -- at least not on a sustainable basis. In fact, many so-called tips are nothing more than the work of stock touts -- paid weasels whose sole job in life is to run up the price of some worthless piece of junk so unscrupulous sellers can exit at a desirable price. The "tip" investor is usually left holding the bag. Ask yourself the following of all tipsters: What's their motivation? How good is their information? (If it's too good, well, then you shouldn't be using it anyway.) What is their track record? I never trade on tips, but I have a network of other pros whom I regularly swap ideas with. This is very different than a "tip." I deal with one trader who knows the gaming sector inside out -- that's his expertise. He's helped make his (and my own) clients a fortune. Another is an analyst (Charlie Wolf of Needham) who covers the PC sector -- he got me into Apple ( AAPL) at the bottom and out of Dell ( DELL) at the top. I sift through Cody Willard's
|1.||Expect to Be Wrong||2.||Your Fault, Reader|
|3.||The Wrong Crowd||4.||Bull or Bear? Neither|
|5.||Know Thyself||6.||Prepare for Battle|
|7.||Bite Your Tongue||8.||Don't Speak, Part 2|
|Check back for more of Barry Ritholtz's |
Apprenticed Investor series