Heed the words of investment gurus to avoid investment mistakes. Investment words of wisdom may be especially appropriate as we consider current circumstances: bonds have plunged in value this year and signal the end of a 30 year bull run, US stocks recently have hit new highs, there are troubling overseas developments (Syria, Iran) and we have the prospect of yet another US government shutdown. On the other hand, the variables change but “crises” and “problems” always occur and always (at least temporarily) affect markets.
Here’s some food for thought from 3 great investors to help avoid investment mistakes:
1. Avoid Market Timing – Peter Lynch
2. Don’t Let Your “Gut Emotions” Steer Investment Decisions – Benjamin Graham
3. Crises in Markets Come and Go (and Never Disappear) – Shelby M.C. Davis
Avoid Market Timing – Words of Wisdom from Peter Lynch. Peter Lynch rose to fame by successfully managing the Fidelity Magellan Fund (1997-199) and racking up an eye-popping 29% annual rate of return. Sadly, the average investor in his fund during that 13 year period earned a small fraction of 29% by jumping in and out of Lynch's fund to try to enhance returns. Another example: the S&P 500 (1992-2012) registered a nice 8.2% annual return. What kind of return did investors earn if they missed the best 10, 30, 60 or 90 trading days that occurred during this 20 year (approx. 2,500+ trading days) period? Instead of an 8.2% return, investors who missed the best 10 S&P 500 days earned half as much (4.5%); those who missed the best 30 days earned ZERO, those who missed the best 60 days lost 5.3% per year for 20 years and those who missed the best 90 days lost a whopping 9.4% per year for 20 years. In other words, stay at a party from start to finish – don’t dart in and out if you don’t like the music or find the conversation boring!
Don’t Let Your “Gut Emotions” Steer Investment Decisions – Benjamin Graham. Benjamin Graham is considered the Father of Value Investing – he wrote a number of classic books on security analysis in the 1930s-40s. Graham said “individuals who cannot master their emotions are ill-suited to profit from the investment process.” (if you’re wondering how to avoid the tendency to be governed by emotions, hire an investment advisor with a solid non-market-timing driven approach). Research by Dalbar, Inc. and Lipper (1993-2012) on the average US stock fund return vs. the average investor return sound remarkably similar to the S&P 500 data mentioned above. While the average annual stock fund (1993-2012) returned 8.6% per year, the average stock fund investor return was a measly 4.3% - literally half! The enemies of calm investing include greed, fear, the tendency to chase the most recent “hot thing” and the tendency to crowd the exit door when something turns sour.
Crises in Markets Come and Go – Shelby M.C. Davis. Human history is the history of crises and “relative” periods of calm. It’s no surprise that investment markets exhibit the same patterns of exuberance, fear and everything in between. This is true even if every specific crisis seems to consist of a different combination of variables (be it stagflation or inflation, collapsing or soaring energy prices, collapsing or soaring home prices, etc). A wise investor acknowledges that crises will come and crises will go, and his or her investment strategy will adjust to changes but avoid drastic over-reactions (crowding the entrance doors to buy or crowding the exit doors to sell).
Projected investment rates of return inevitably are based upon past decades of data (although we always say “the past is no guarantee of future performance…”). Here’s something to think about – the S&P 500 from 1927-2011 had an annual compound rate of return of 9.75%. Included in this data series is: the Crash of 1929 and the Great Depression, along with subsequent booms and busts. The lessons provided by these 3 investment sages is that your own mistakes may be a bigger source of your own poor investment return than economic and political variables that move markets and are beyond your individual control.