Two Investor Mistakes
I find the columnist, Morgan Housel, to be very perceptive and astute. His “Nine Mistakes Investor Make”* have been witnessed many times over the years.
Two of those mistakes stand out because of their frequency and potential for damage to a proven investment discipline.
Mistake #2: Extrapolating the Recent Past into the Future
The growth of large technology company stocks in the late 1990’s led some to the belief that growth would continue into the new millennium despite bubble-like prices.
That bubble burst in 2000-2002.
The decline of global stock prices in 2008-2009 sent investing fears to levels last experienced in the Great Depression. The Great Recovery began in March 2009.
More recently, the 10% drop in the S&P 500 triggered fears of another bear market. The subsequent recovery from that 10% decline spawned optimism.
Recent pasts do not lead to predictable futures.
Mistake #6: Impatience
As you have heard us say, short term market movements are not knowable. We manage to target blends with a realistic expectation for results within the probability range of returns that you know all too well. Patience is required.
We witness the “extrapolation” and “impatience” mistakes in the discretionary cash flows into client accounts. During good times, cash flows increase while they decrease in challenging times. While we all ”know” that buying low is the correct behavior, we realize that adding to temporary weaknesses is difficult. In a world of short term uncertainty, it’s best to add cash when it’s available, avoiding the tendency to market time.
*Source: “Nine Mistakes Investors Make” by Morgan Housel, columnist at the Motley Fool, Wall Street Journal, February 28/March 1.
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