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:
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."
So many people have missed the rally in its entirety or in part since the Devil's Bottom, when the S&P 500 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."
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 Lehman Brothers bonds.
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.
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