As I’m coming back from vacation, I asked Paul from Capital Manifesto to write this guest post about investing behaviors. I can relate to this article as in the past two years, my dividend stock picks did very well but I wasn’t able to avoid “the Big Miss”. My two trades on RIM (2011) and on VNP (2012) were two “Big Miss” and brought my whole portfolio down. The funny part is that I’m a similar golfer; I’m doing well overall but I’m always trying to do THE shot that will make my game exciting… or make a triple bogey!
Many people always want to know what the best way to get great returns are. Of course, they are looking for that one magic bullet that will make their portfolio or other investment sparkle and outperform all of their friends. Unfortunately, it NEVER works that way because as one investment gets hot, other investments will start to lag and vice versa. It’s just the way the cookie crumbles, much like everything else in life.
I recently read the controversial book by Tiger Woods’ ex-coach, Hank Haney. He spoke that when he coached Tiger, and other golfers like Mark O’Meara, he always tried to teach them to avoid “the big miss” while playing golf. For those of you golfers out there, this is usually that one horribly errant drive or bunker shot that could make an easy par or bogey into a disastrous triple bogey, or worse. If you have one or two per round, which is a problem I used to have until I got professional lessons, it can mess up your game, your mind, your confidence, and then you will wonder why you even play. Same with investing: If you have your steady investments but every so often you have that ONE or TWO laggards that really drag your portfolio, you will seem like you are never gaining ground on retirement. It can be demoralizing. So the key is to avoid “the big miss” in investments, just like in golf or any other sport you may play.
To continue with the golf analogy, many people know that Tiger Woods has been a dominant force in golf since he arrived in 1996. Yes, he is going through problems now, but even this year he has won two events and seems to have his game coming back. When Tiger was dominating year after year, if you look at his stats, he only average 0.5 to 1.5 strokes per round better than his best peers yet he dominated even the #2 ranked guys because if you add up 0.5 or 1 stroke per round to a four round tournament, it added up to a lot of strokes and a lot of wiggle room.
Warren Buffett is our Tiger Woods in the investment world. He has racked up 20%+ returns since the 1960s and if you look at his yearly performance, he rarely has down years. In fact, I believe he has only had 2 down years in all of those years. Does he have some major advantage over everyone else? I think he does NOW because everyone brings him the best deals. But back in the 1960s and 1970s, when he was crushing even 20% returns, he had the same information as other people in his group but he assessed investments differently. He looked at the base value and if he understood the business and the moving parts, he was willing to invest. Too often, even “expert” investors chase returns and that is where problems happen. Usually when returns become hot, that is when they are poised to have problems. It goes back to my article on the volatility index, when everyone is happy and optimistic is usually when things are ripe for a correction and vice versa. Is this set in stone? Of course not…
…But look at other events of the past: Tech stocks of the late 1990s and real estate of the 2000s. When those sectors were hopping and popping, no one could find a bad investment and no one could say why any investment should be looked at cautiously. You have to be able to break every investment down into its basic form. If you don’t feel comfortable with the outcome, avoid it. This is how you can gain an edge of a few percentage points per year. Look at historic trends in investing, such as the fact that dividend paying stocks have routinely beat the S&P 500 overall by 2-3% per year for decades. If you averaged 2% per year for 30 years on top of the S&P 500, you would have over double the amount of money than if you just matched the S&P 500 return which is already considered a pretty good benchmark!
I don’t have the secret investment advice to get you your edge consistently over time. What I can say is that understanding and avoiding what you have a gut feeling is incorrect is a good way to start investing. Avoid “the big miss” by avoiding what your golf buddy or neighbor is telling you to invest in because this may only cost you a percent or two per year, but if you save that, as you saw in my last paragraph, you would be able to retire with over double the amount of money than following the fun trends.
Author Bio
Paul Gabrail is an investor who prefers to focus on the realistic aspects of the economy. He is never hesitant to offer his oftentimes unique perspective on all matters related to the economy, real estate and personal finance.
He co-founded Select Investment Group, a real estate investment firm that owns and manages 800 rental unit properties and $60 million in assets. He’s also a partner at MGO, a private wealth management firm with more than $400 million in managed assets. For more articles and thoughts like this, you can visit his blog www.thecapitalistmanifesto.com or follow him on Twitter @capmanifesto.
A good article. I try to talk to my family and friends that as long as they manage the risks (i.e. downside), they can do much better than other people. Often, some of us are very trade-trigger-happy and trying to catch that “rainbow” (i.e. surge of stocks) instead of analyzing the downside first.
Actually Tiger has won three times this year! I too read the book. Haney suggests Tiger could have won even more had the been more conservative. So true in investing. I have had three big misses. One in the tech bubble, one recent tech bust and of course, Rim. I was told to sell it but didn’t listen, thinking it would come back. Right. How do you stop being emotional about a stock? I’m reading Jim Cramer and there is no emotion with him. Multiples, growth rate and certain stocks for certain cycles. Dividend-paying stocks don’t cripple a portfolio. But greed kills.
@John: Thanks! Yes, the Trigger Happy mentality will most surely catch-up to you at someo point. I am glad you saw the value in this article.
@Al: Ha. Yes, he has .He has done well. I would hope it’s from avoiding the “Big Misses.”
JIM CRAMER!?!? No emotion!?!? He was a nervous wreck back in the day! And he was a trader, not an investor. With trading, unfortunately, a lot of it has to do with emotion because with investing for the long term, you can know that you are investing in the right company and just keep at it.
Taking the emotion out takes a lot of time to master. It took me a decade to learn how to. When it came down to it, I just realized that I made my decisions based on X # of factors. As long as none of those factors changed, I didn’t care where the investment was valued at because, in the stock market, a stock price is rarely based on value. It is based on emotion. So you just have to be the disciplined one to know that a company that is solid that may be sellign at a P/E of 10 IS worth a P/E of 15 and you just have to wait until the rest of the market realizes that. And that may take years. It’s not fun or glamorous but it’s the real way to do it.
That’s good advice. I also find that the risky investments are bringing my whole portfolio down and also gives me heartburn. Lately, I’ve been avoiding the high risk investments and I’m less stressed out overall.
@Joe: That’s a big part of investing that a lot of people miss. Yes, EVERYONE wants bigger returns, but are you able to sleep comfortably taking the risks that may be necessary? There isn’t anything wrong with saying “No.” I say “no” all the time. I can’t stomach massive fluctuations.
Awesome post! 🙂 Not much to add to that, other than boring and dull wins the day! It makes sense to keep the risk plays out of the core portfolio – its the only way.
Cheers!
It is scary how much I can relate. I do regret the mistakes in the past. When it comes to a certain investment, it does not matter how positive everyone is about it. It is essential to practice caution such as by performing market analysis and risks management.
You don’t have to outrun the bear, just the other investors.. Or something like that. Risk management is crucial in finances and life.