As part of my preparation for 2017, I asked how I could be most helpful for individual investors. The suggested resolutions are a combination of expert investment methods and avoiding the most common investor mistakes. They may be difficult to follow. If you can, you will find them profitable.
Make a fresh start. We should do this constantly, but the calendar is a good reminder. One of my former bosses took a vacation at the end of each year. His instructions included a list of stocks that he “did not want to see on his sheets” when he returned. He knew the right thing to do, but it was still difficult for this top professional to do it himself.
- Review your losing positions. Is the thesis intact?
- Review you winners. Is it time to trim? Have you reconsidered your price target? Are there new ideas that are better?
- Look past the headlines. Read the actual story. The writer may have one message, while the headline represents another. If you care enough to read financial news, you can spend a few more seconds on each article or post.
- Save time by dumping sources. Conduct a review. If a source has not provided anything helpful in the last two or three years, ignore it! You need the time for more important matters. If the information has led you astray, that is even more reason to move on.
- Do not blame others for your own poor decisions. If you have not enjoyed the market rally, it is not the fault of the Fed, the Congress, the President, the Plunge Protection Team, high frequency traders, or anyone else except you. Unlike casinos, the odds for investments are in your favor. Accept the reality that government officials, all over the world, are attempting to block, fix, or postpone problems. You may not like the solutions, but why not profit anyway?
- Do not be mesmerized by charts including commentary and big, colored lines. Ask yourself whether the underlying argument makes sense. Should you sell your long-held position because a guy on TV says there is “technical damage?” Be sure you know what that means and compare it to your own analysis.
Beware of misleading charts.
- Ignore charts that “prove” that current markets are just like some prior time period. With modern software, it is easy to cherry-pick some prior period, adjust the scales, and scare people witless (TM OldProf euphemism). Do not be bamboozled by this cheap trick.
- Ignore charts that are too good to be true. They are. Usually the researcher has used too many variables on too little data. If you do not understand what that means, it is even more reason to be skeptical. You will have a high susceptibility to confirmation bias.
Do not blindly accept “headwinds” or “tailwinds” stories. These are popular, easy to write, and require little research. Just ask yourself a few questions.
- Is this really likely? Can I even estimate the probability?
- How big are the consequences?
- Can we expect a policy reaction?
- Learn to use “business cycle peak.” Ignore all talk about “recessions.” The term has been corrupted in a way that is beyond repair. My educational effort is a lost cause, since most continue to treat below-trend economic growth as a recession. This makes them live in a state of constant fear. Bad consequences for stocks occur right after a business cycle peak. So far, so good, on that front.
- Turn the page when you see “ageing bull” or the like. While it is true that this economic and stock cycle is longer than the norm, it has been gradual and started from a very low point. Suppose we had flipped six heads in a row. Does that change the odds of the next coin toss?
- Do not use your conclusions to go “all in” or “all out.”Everything you see urges you to believe that you are a great market timer. Get real! No one does that consistently. The best we can do is to control risk.
So most importantly —
Evaluate the risk of your portfolio and make sure that it is appropriate to your plans and circumstances.