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Six Powerful Ways to Fail With Stocks

Six Powerful Ways to Fail With Stocks
  1. Get excited about the next "new thing", and then load up on companies who are the early entrants for that theme. This is a trap because it appeals to the common sense of most people. Yet there is little evidence that it works, or that it is consistent with the nurturing of an investor's healthy mentality. The public doesn't know this, but the 'promoters' do, and they are ready to exploit you - a person ' even as they are telling you to exploit an "opportunity." (Most of us were taught that it is good to exploit opportunities, but it is wrong to exploit people. Ponder.) Think of the number of "new thing" companies that were born into the tech bubble. A few did well, most did not, and many went bankrupt. Think of biotech, where the next "hot drug" is often supported by very appealing hype. But whom do you know who got rich' When you start hearing people say things like, "This is really going to be big", there is an excellent possibility that they are hoping to drive prices up for their own benefit, rather than to help you find nuggets of gold. This strategy is like many others, which are dependant on investors getting caught up in 'the story.' This is a mistake. The story must be the result of powerful economic fundamentals, not the other way around.

  2. Get competitive and make portfolio performance a race. This appeal, which has "mine is bigger than yours" as its driving force, is a child-like approach that is self-defeating. 'Beating your neighbor' mentalities, or 'beating the index' approaches, serve to take the investor's eye off of their individual risk/reward suitability standards, and regrettable choices are likely to follow. Performance is not a reasonable goal. Performance expectations (reward), are the result of the standards, disciplines, and risk levels that investors set for themselves. If you can keep the risk beneath the level of your discomfort threshold, and the return above the level that is generally associated with that risk, you are a successful investor. The one that should be impressed, with your success or failure, is you. Your neighbors, the indexes, and the media will invite you to be competitive, but truth be told, none of them care much about you, or your results.

  3. Surrender to Index* investing on the theory that: "If you can't beat them join them". Unmanaged Index* investing certainly has its appeal, given that it appears to be 'low cost', and that many investors find it difficult to outperform the major indexes. But index investing can have serious drawbacks for investors because investors are individual human beings; they are not lowest common denominator databases. When investors surrender to this approach they are giving up selectivity, which becomes apparent when they look at the securities that make up a given index and immediately see they will be accepting various companies that they would never buy individually. Investors also give up custom management, which includes suitability needs, tax considerations, social and moral preferences, and appropriate weightings (many indexes are weighted by market capitalization), etc. Most importantly, any attempt to own representative holdings to mirror indexes rather than individual securities also separates investors from the ownership mentality. Rather than functioning with confidence in the 'companies' they own parts of, they operate blindly hoping to "rent performance" from advancing markets, via an index. This can lead to the abandonment of investment commitments, and the tendency to 'dump and run' when the headlines feel scary. Simply stated, anything that increases the tendency to invest - or divest - based on emotion, is no friend to the real investor.

  4. Be a shareholder rather than a shareowner. Long-term investor behavior studies (Dalbar ten-year studies) indicate that investors as a group, loose over half of the returns that growth investments actually earn, as a result of heir own erratic behavior. This takes the form of selling too early (or too late), market timing attempts, emotionally driven maneuvers, or loosing faith in the "story" of a security that they thought would be the next big winner. The word shareholder, though it is common terminology, falls far short of the commitment and decision to be an owner. When investors think like owners, they are likely to make better choices. Owners set their standards higher regarding what they commit their capital to, and are far more likely to `stay the course' when others are loosing faith. Such losses of faith are really the result of a flawed mentality. Had they set the higher standard of ownership, they would have been more capable and confident, and less likely to be a typical - meaning erratic - investor.

  5. Fail to "assess and adjust." Human nature seems fairly consistent and unchangeable, but the world's circumstances are constantly changing. For example, the prosperity of the nineties produced many changes in attitude. For some, success served to produce lax standards and a false sense of security. That may be the reason that Wall Street has been publicly indicted, humiliated, and let their stewardship standards slip shamelessly. Accordingly, investors must "assess and adjust." We all know that doing things the same way is likely to produce a repetition of results. Therefore, being mistreated by those you trust is not only shameful behavior ' it is the reason that the "mistreat me once, shame on you; mistreat me twice, shame on me" rule is appropriate to keep in mind, when certain patterns persist. It is the traditions of Wall Street, fraught with conflicts of interests, biased advise, product creation - which is sold by sales forces that hold themselves out as impartial brokers and advisors - that has produced a self-serving sell-side industry. According to the highest authorities, these folks have repeatedly betrayed the public interest. Therefore, this is an example of where investors must adjust. They must set higher standards. They must not tolerate the traditions of failed stewardship. The must require objectivity, independence, experience, wisdom, investment credentials (not sales skills), honorable behavior and excellent character. The time has come.

  6. Failing to plan. Good financial planners make a good living because when people are young many fail to see that a good plan in the accumulation years of their investment lives may determine the amount of assets that will be available for their retirement years. But when people mature, it is the investment portfolio that requires the professional plan. Ironically, many investors simply shoot from the hip. They get pushed around from the pressures of life, pressures from well-meaning friends and family, and bad leadership from parts of the media, to say nothing of the ways and traditions of those previously mentioned. Other than getting you to say yes, what is the plan for portfolio success that sales-driven brokers believe in? Or are they too, shooting from the hip. Your plan is really your well understood investment style, assuming you have one. Benefiting from thirty years of experience, and a three generation heritage in the investment business, I believe there is no better portfolio plan than the following:

    • Only invest your time and money in companies that are truly the most worthy of your capital, based on measurable historical results.
    • Be disciplined about the price you will pay for your portfolio purchases.
    • Diversify; never put too many eggs in one basket.
    • Rebalance the risk associated with your most successful investments.
    • Pay attention to tax consequences.
    • Stay the course.
    • Re-study this list as a discipline.
*Indexes are not securities and cannot be invested in directly.

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