In sticking with this weekend's behavioral theme that started with yesterday's video, Barron's had an article about the shadier side of the investment newsletter business. The reason shady newsletters, pump and dumpers and the like exist is because people are greedy. If there was no greed to prey on there would be no investment scams. The stock market, hopefully, is a place to get rich slowly. Occasionally you or someone you know may luck into something that makes you rich quickly but that is unlikely to come from a newsletter, message board or unsolicited email.
In general, people seem to have a difficult time understanding the risks that they take. If you put 1/4 or 1/3 of your money into something that is not cash or a treasury product you are taking an enormous risk. Even if nothing bad happens you are taking the same risk nonetheless. An example of this that I have used before is with Amazon.com (AMZN). If you put 100% of your portfolio into the stock at $1.48 on June 27, 1997 and sold it Jan 11, 1999 at $92.31, was the risk you took any different than the person who bought your shares from you with 100% of his portfolio who then rode it down to $6.08 on October 2, 2001?
The risk is of course identical but the result different and only one of the two investors had to deal with negative consequences. Too many people take this type of risk. On a more realistic basis too many folks think nothing of putting 20% in something that they don't think can blow up. Anything can blow up, anything. Owning something that does blow up is probably beyond your control but how much of that blown up thing you own falls squarely on you.
I would call what happened to the Macquarie Infrastructure Trust (MIC) as a blowup. At a 2-3% weight it is the sort of thing that will literally be forgotten about. Had it been 20-30% it would have been ruinous.
Unrelated, there is a car parked at the bottom of our hill. It is a very cheap Mercedes and the license plate says SPENDZ. Do you wonder sometimes how we got to where we are with all of this financial mess? Well I think the person who drives this car is the epitome of what is wrong. They could have a whole lot more Toyota for less money than they spent on the Mercedes and they enjoy spending so much that they paid extra money to the DMV in order to proclaim it to the world.
This takes me back to Nassim Taleb's appearance on Squawk Box a few weeks ago when he shared his grandmother's financial advice which was to have a lot of money in the bank and not have too much debt. Children know they should save and not have too much debt yet somehow something happens as people become adults and they make poor decisions. This is true of people in my family, my wife's family and probably somewhere in your family too. Who thinks living below their means is a bad idea? Who thinks living beyond their means is a good idea? I suspect that the problem is not that people set out to live beyond their means but that many who do don't realize it.
I think these sorts of behavioral things (spending too much, saving too little, letting greed get the better of you, panic selling, panic buying) do far more damage than the market ever does.
8 comments:
"I think these sorts of behavioral things (spending too much, saving too little, letting greed get the better of you, panic selling, panic buying) do far more damage than the market ever does."
Agreed. That is why I think buy and hold makes so much sense for most people. Knowing what real rate of return combined with a proper savings rate is necessary to achieve one's realistic goals and then selecting the proper asset allocation to meet those goals. Key being realistic goals. Failure to be pragmatic is a killer too.
Many secondary factors can go into real rate of return including low investing costs and tax efficiency.
10:43
It is a rare investor who possesses the math skills, discipline, interest, and financial knowledge to do what you suggest. Most of the U.S. population's eyes glaze over when fractions or percentages. How can they possibly construct and maintain a proper portfolio?
Roger's right about behavioral traps. I would also add that many so called financial advisors fall into the same trap too as their clients expect them to do something to justify thier fees. Seen it first hand with my in-laws.
While not totally wrong about the mercedes, random, methinks you are going a tad overboard. The guy driving that car may be financially set, even after the recent financial tumult. Likewise, there's an expensive car I often seem to be behind when i drive home from work with plates of "PWRNMNY" - power and money - i find it simply humorous, not the "epitome of what is wrong". Our differing takes on this to me do not say that either of us is wrong, simply that we have a different take on what is important in life.
Referring to a previous post about the hermit in Prescott, Az; Could he be the author of The Traveler, a fiction story written by an anonymous author who lives off the grid to avoid gov't. control. He sort of fits the profile by his references to living off the grid, an he appears to be rather literate. Just an interesting coincidence, I'm sure.
Sam
The bear market is over...
this is a sign:
http://tinyurl.com/cvn48t
attempt at humor
Guys, stop worrying about this normal bear market. I am 59 with 90% in stocks and have seen this before. I lose no sleep over my portfolio being down 45% last year because I know in 4-6 years I will be back to even. It has happened to me before and I am glad I stayed fully invested.
Greed, debt, friends, and family leads me to think about Dave Ramsey. (Motivational Christian money coach guy). Dave motivates and excoriates people to get out of debt and start saving by using behavioral and emotional appeals almost exclusively.
Going along with what Anon 11:11 mentioned about average "investors" Dave goes pretty light on theoretical underpinnings of wealth management. I have this love/hate reaction to him though because his investment advice is really not that great. So I have friends and family who have money to invest only because they have paid off their debt by following Dave Ramsey, but then the investment advice they get from the same source is quite sub-optimal from my point of view.
Buying Amazon with a PE of 5 or Buying Amazon with a PE of 100 - which is riskier? I agree that the result of the investment does not indicate the risk taken - but certainly the PE you buy in on a stock does - I think your example would have been better if you picked 2 otherwise identical stocks - and one went way up and the other went way down.
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