Behaving Badly

The last several months have showcased why many investors fail. In a nutshell, they behave badly. It is hard enough to save – which requires sacrifice; to make discernments about investable assets – which requires education; and to harvest results – which requires patience. Failures in these basics are vastly common. But even those who master these at least in part are capable of proverbially shooting their portfolio in the foot. Here are some examples, all of which have been on display recently:

  • Buying into what’s doing well without conducting a rational analysis. There is a reason Amazon, Netflix, Twitter, Go Pro, FitBit, and so forth shot up to the stratosphere. It was investors buying their stocks. But none of these companies sells at anything even remotely resembling a decent value.
  • Selling what’s doing poorly without conducting a rational analysis. While the earnings-lite group above was surging, tiny declines in earnings at spectacular companies trading at low valuations caused these stocks to crater further. But in the context of a multi year holding period, earnings misses of pennies, or even a dollar, are irrelevant, especially if they are caused by currency changes.
  • Indexing. The index strategy is a triumph of thoughtlessness, and perhaps laziness as well. Hundreds of funds and managers have beat common index benchmarks over time. Finding them is not hard – Morningstar is available to anyone with a computer or a library card. The myth that active managers cannot outperform benchmarks is just that – a myth. On the other hand, we don’t mind if investors prefer to run their money via a computer, because it does create opportunities for thoughtful people.
  • Picking on one or two holdings that happen to be at losses, when the balance of the portfolio is doing well. It’s great to optimize holdings; we spend a fair amount of time considering whether what we own could be improved by a swap to a new holding. But just because a stock has moved down since purchase doesn’t mean it’s a crappy company and should automatically be sold. It may only mean you bought it wrong. Don’t hold your buying decision against the stock; what matters is what it will do from now on, not what happened in the past.
  • Timing the markets. It cannot be done. If you ‘win’ because you sell in time to avoid a crash, you will not get back into the market in time to reap the benefits of the recovery, which happens very quickly after bear markets.

There are other examples of bad behavior of course, but this roundup represents the most egregious examples we’ve seen lately.