Hi Guys,
Earlier today I posted a reply to MFO member Vintage Freak’s observation that “We suck!” as investors. I’m sure that exclamation was made in frustration. I disagreed, and said so.
My response was a reflexive reaction. On reflecting on the matter, I liked the submittal. I concluded that my rapid reaction might be of more general interest to the MFO population as a whole. A wider audience distribution might be appropriate.
So I decided to repost. However, I believe in a value-added policy. So allow me to append an eighteenth mistake that Merriman identified. It escaped me initially. Also permit me to add my version of a slightly modified ancient joke.
First the joke. We all recognize that market wizard’s foolish forecasts are no more accurate than those made by informed amateurs. So: Fool me once, shame on you. Fool me twice, shame on me. Fool me thousands of times, shame on financial experts.
I hope that was not too painful.
Secondly, Merriman also includes a Mistake 18 very late in his paper. For completeness, here it is: Mistake#18: Spending so much time focused on investments that “real life” gets crowded out”.
By all means do not fall victim to that pitfall. A portfolio of mutual funds and ETFs go a long way to steering clear of that egregious error; a portfolio of individual stock and bond holdings exacerbates this time sink.
My original post, unedited, follows immediately:
I seriously doubt that as investors “we suck”. I’m sure some of us do; I’m equally sure that most of us do not suck. I do not suck; you do not suck.
We often make misguided investment decisions, but being 100 % correct when forecasting future market movements is an impossible standard. The unknowns and unknowables overwhelm the knowns.
Don’t judge yourself so harshly. Experts make faulty decisions just as often as we do.
Taken in isolation, brainpower is not sufficient by itself. From the dustbin of history, Sir Isaac Newton lost a fortune in the South Sea bubble; Albert Einstein lost when he overcommitted to failed municipal bonds early in the 20th century. John Maynard Keynes recorded a rocky up-down financial career with his beauty contest approach to investing.
Recently Nobel laureates and economists Robert Merton and Myron Schols were founding members of the Long Term Capital Management debacle. Physicist John Allen Paulos unwisely had a love affair with WorldCom stock while sacrificing 90 % of his investment to bad practices. He did write a book, “A Mathematician Plays the Stock Market”, so he likely recovered from some of his misfortunes.
My takeaway is that scientists are not immune to the same investment foibles that endanger and compromise our investment decision making.
Brainpower is a positive asset, but it must be supplemented with large inputs of knowing the rules and the odds of the investment playing field. A little commonsense also is beneficial. The other side of the investment coin is familiarity with the many pitfalls and traps that snarl neophyte investors
Paul Merriman has an excellent article that identifies 17 common traps. Avoiding these wealth eroding traps should remove anyone from the Sucks list.
Mistake #1: No written plan
Mistake #2: Procrastination
Mistake #3: Taking too much risk
Mistake #4: Taking too little risk
Mistake #5: Paying too much money to others
Mistake #6: Trusting institutions
Mistake #7: Believing publications
Mistake #8: Failing to take little steps that can sometimes make a big difference
Mistake #9: Buying illiquid financial products
Mistake #10: Requiring perfection in order to be satisfied
Mistake #11: Accepting investment advice and referrals from amateurs
Mistake #12: Letting emotions – especially greed and fear – drive investment decisions
Mistake #13: Putting too much faith in recent performance
Mistake #14: Failing to resolve disagreements between spouses
Mistake #15: Focusing on the wrong things
Mistake #16: Not understanding how investing works
Mistake #17: Needing proof before making a decision
Sage advice. Making just a couple of these errors can be ruinous to portfolio health. Merriman concludes the article with recommendations to avoid these pitfalls. Applying his experience-based observations might just save everyone more than a few bucks. Here is the Link to the complete paper:
http://www.merriman.com/PDFs/AvoidTheWorstMistakes.pdfPlease give it a try. It’s worth your time commitment.
Vintage Freak, the marketplace is a tough demanding master. But it can be controlled with discipline and patience. Just review the Lazy-Man performance record that is often referenced in MFO postings.
The long term performance of all these simple options hover around the 7 % annual rate of return. These are accessible, real, and are realistic expectations for market rewards. They demonstrate that investing can be made simple.
But simple does not necessarily equate to easy. It takes work. Sometimes it is not easy to overcome behavioral biases, greed, and the devil renegade in each of us.
Some luck is always needed.
Best Regards.
Comments
I opened account with Vanguard so I can buy NTF my "go anywhere do anything funds with high fiduciary score" funds, and then maybe index funds. That's the idea for the most part anyway.