Four ways investors have lost money and missed opportunities even in the midst of this current bull market, from investing emotionally to letting themselves get spooked.
At the 15th annual Investment U Conference in St. Petersburg, Fla., last week, I spoke to the few hundred people in attendance about “How to Lose Money and Miss Opportunities.” For some reason, I was the only presenter who chose to speak on this topic. So I had the field all to myself.
Here are just a few of the techniques I described:
1. Run your portfolio based on someone’s economic forecast.
Why is this move such a great way to lose money? For starters, not even professional economists can regularly predict GDP growth, inflation levels, interest rates or the future value of the dollar. (Newsletter editors aren’t so hot either.) But even if somehow, magically, you could know how the economy was going to perform, that still wouldn’t tell you what the stock market will do.
Perversely, stocks often rally during the bad times and sell off during the good ones. Witness the last four years — hardly the best of times — and yet the stock market has more than doubled. Missing an opportunity this big is money out the window.
2. Invest emotionally, not rationally.
No one sets out to do this intentionally, of course. It’s just that human beings tend to make buying decisions on emotion and then justify them with logic.
Visit a car dealership, for instance, and you will see a beautiful new automobile with your name on it, spit-shined and gleaming in the showroom. Smell that fine Corinthian leather. Admire the burled walnut trim. Listen to the Bose stereo system with the 250-watt amp. A new car is an extravagance, of course, but when the salesman tells you about the great mileage it gets, you start to imagine how practical it would be to own this car.
The same sort of thing happens in the stock market. Investors tend to buy stocks when they feel euphoric (and stocks are high) and sell when they feel depressed (and stocks are low). This is emotion talking, pure and simple. Yet we tell ourselves we’re only being rational.
3. Let the national news media spook you out of the market.
Media companies need to lure advertisers. But advertisers want viewers. So media companies grab their attention by scaring the pants off of them. A recent study showed that more than 90% of the news stories in The Washington Post have a negative slant. Television is even gloomier … and more sensational, delivering a skewed view of the world where we seem to lurch from one “looming crisis” to another “dangerous development.”
Meanwhile, people and companies go on about their business making sales and generating profits. Yet millions of investors, feeling the world must be going to hell in a hand basket, miss out on superb opportunities. Or sell in a panic and lose money.
4. Subscribe to the merchants of gloom.
There are plenty of them out there. They’re the ones who told you when the Dow hit 6,500 four years ago — one of the great buying opportunities of your lifetime — that this was just the beginning, that Dow 3,000 was just around the corner.
What you may not know is that most of these guys have been peddling gloom and doom not just for years but for decades. Are you taking advice from a perma-bear? There’s an easy way to find out. Ask him, “When was the last time you were bullish on stocks and why?” There’s a good chance the answer is “never.”
As one newsletter editor told me, “My job is selling gloom and doom to grumpy old men.” Hmm. If you are bearish, male and (ahem) of a certain age, you might want to reassess.
There are plenty of other great ways to lose money and miss opportunities in the midst of “the most disrespected bull market in history.” And I’ll have four more of them for you on Friday…