Every investor makes this devastating mistake at some point (usually early) in their investing lives. Not only can it be difficult to recover from, for most, it results in a scarring conclusion to their adventure into the otherwise potentially-lucrative world of investing.
On January 1st, 2016, I went off on my own. I was officially investing full time. Before that point, when there was no pressure, when stock research was just something I would do in my spare time, I’d been successful at identifying high-quality, undervalued stocks in which to invest.
But once that was my full-time gig, I felt like I needed to do more, like I needed to identify more opportunities than the 4 or 5 stocks I was finding each month. So, I sought help from others. I paid for several monthly stock selection subscriptions. I constantly had CNBC playing in the background. I started listening to others to find and implement ideas.
Sometimes these ideas played out as expected. Sometimes, of course, they didn’t. And then there was that one time—and this is what set me straight—one time the trade went horribly wrong. My position was crashing. I was bleeding money. I didn’t know what to do...
It was stressful and scary; I felt like a failure. The experience taught me an important lesson, but it was extremely difficult to live through.
Well, you don’t have to.
[Don't forget to check out the video version of this post on YouTube. It's much more entertaining... see for yourself!]
What was the difference between my pre- (and post-) 2016 success and that brief stint where I experienced several overwhelmingly stressful trades?
I stopped relying on myself and my own research and conclusions. I stopped playing out every possible scenario in my head before entering a trade. I started:
Relying. On. Others.
And that was my crucial mistake. I have since repented and recovered. But this is a lesson that almost every investor learns the hard way at some point:
It is dangerous to rely exclusively on others investment ideas!
How do investors find themselves in positions they don’t fully understand and an emotional wreck when those bets don’t play out exactly as expected?
It starts with the fact that we’re surrounded by so. many. “Experts.” Professionals (or not) who are more than happy to share with you the next hot thing.
You have the screaming heads on TV, the well-spoken “experienced” or professional trader, and the wise, successful friend or associate. They're all trying to pitch you on and convince you of something...
It’s okay to have someone you trust give you ideas, but it is dangerous to invest in those ideas without any further consideration or access to information.
It is a viable strategy to hear them out and then—and this is the essential part—do your own research to supplement their investment thesis and come to your own educated conclusion.
I get it: there are countless investment opportunities in the world, and if it’s not what you do professionally and it’s not your passion, that can be an impossible mountain to sift through. But the ideas you hear from others, need to be the start of your investment process, not the end.
Alternatively, if you have full access to when and why that person-you-trust makes each and every trade—so you know when they’re entering, exiting, increasing, or decreasing their own positions—that too, could be a viable strategy for you.
I’m reminded of a young professional investor who, while stranded in an airport, had a brief chance encounter with his life-long investment role model. They began discussing their current theses on different markets. One in particular stood out to the novice investor. It was a trade made by the veteran that was the exact opposite of his own. Before he could ask for more information, the seasoned trader was boarding his flight.
This weighed heavily on the young pro. He didn’t like betting against his investment hero. He decided that he, the young one, must have missed something, so he reluctantly flipped his position. He trusted the veteran’s opinion.
The next day he suffered a significant loss in that position before pulling out. Turns out the young professional had been right. It’s too bad he had doubted his own research. It appeared the old pro had lost his touch.
Later that week he received a call from the veteran, asking how he was doing. The young trader explained that he was a little upset after the loss and expressed concern for the veteran, because he knew that the veteran’s bet had been much more significant.
The old professional was confused. He told him that he had made money on that position every step of the way. In the few hours after they had spoken in the airport, the market moved exactly as he had anticipated. Then, his research suggested that it was about to go the other way. So, unbeknownst to the young investor, he profitably switched his thesis, and consequently, his position.
The young professional was trading with an entirely different time horizon than the veteran. He didn’t have access to all the information, and his portfolio suffered for it.
One of my best friends is this way: constantly wanting to know the specific stocks I have identified as having 100% or more potential return. I’ve always been hesitant to share. Not because I don’t want him to profit from them, but rather because he doesn’t know exactly when my research might indicate that I make a change to that position (it could be a couple years from now, it could be hours from now).
That’s why I cringe when I see people investing their own hard-earned cash without any more than a hot (at least for now) tip to guide them. What should they do next? Knowing that is an important part of a successful investment strategy.
That’s actually one of the reasons I started my Patreon account, so that I could provide that friend and anyone interested with real-time updates, so you know exactly when and why I make every single move.
So whenever you hear that next good idea—and inevitably you will—whether it comes from me, Jim Cramer, or your best friend—I don’t care how amazing and urgent it sounds—do not invest while relying exclusively on someone else’s tip!
Do your-future-self a favor and either
My goal with Spicer Capital is to help you build your rapidly-growing, highly-diversified net worth. I hope you'll stick around and explore the many resources we've created for you, get your free copy of my book, download the free audiobook version (while my publisher still lets me give it away for free...), subscribe to our YouTube channel... whatever avenues would be most helpful for you!
I sincerely look forward to spending more time with you in the future (...maybe in the comments? I hope to see you there).
In Homer's epic poem, The Odyssey, Odysseus must sail past the land of the Sirens. Warned that their song would lure him and his crew to their watery grave, he ordered his sailors to plug their ears with beeswax. But Odysseus, ever the curious traveler, longed to hear the song of the Sirens. He ordered his crew to tie him tightly to the mast and not let him free, no matter how much he begged.
Tempted by the sirens' beautiful song, he commanded his men to untie him. Fortunately, they heeded their previous orders and bound him tighter. Despite his precognition, even the strong-willed Odysseus would have fallen victim to the sirens' seductive calls.
In the treacherous world of investing, the sirens' cry assumes many forms. Unlike Odysseus and his crew, however, we do not have foreknowledge of exactly how or when they will try to lure us to our demise. All we know is that it will happen.
If you had invested $1,000 in a 60/40 stock/bond portfolio at the beginning of 1997, it would have been worth $3,756 at the end of 2016. If you had been able to invest that money in Princeton’s endowment, it would have been worth $10,078--168% more!
The biggest difference?
Princeton has over 70% of their portfolio allocated to alternative investments.
Although alternative investments (alts, for short) may seem elusive to the everyday investor, that is simply not the case. Many alt strategies are affordable and accessible to almost anybody interested in the enhanced diversification they can bring!
Why, then, don’t you see them in your portfolio?Continue Reading
Last week, I warned of the dangers of blindly following the data-backed recommendations of today's financial advisors and pundits. That article concluded with this thought:
Challenging the comfort of the traditional investment paradigm can be depressing and stressful, but it can also put you on a path of lifelong prosperity - come what may.
It can be upsetting to see how quickly we forget this reality: trends change and history is made. It has been fascinating to study times in history when decades, centuries, and even millennia of convincing data have supported hypotheses that turned out to be absolutely incorrect. With that theme in mind, I created this infographic including some of the most interesting and compelling examples from the history of the world.
Mark Twain popularized the phrase, “There are three kinds of lies: lies, damn lies, and statistics.”
Assertions supported by compelling statistics derived from historically exact numbers often appear infallible.
Sometimes, a statistical hypothesis – even one backed by decades or centuries of cogent data – proves dead wrong. Often, in such scenarios, people previously comforted by its sound logic are astonished and devastated.
Super Bowl 51 provided us with a prime example: with 8 minutes and 31 seconds remaining in the third quarter, the New England Patriots trailed the Atlanta Falcons 28 – 3. Fifty years of historical data suggested there was no way the Patriots could come back and win. No team had ever come back from a deficit greater than 10 points (let alone 25!) to win a Super Bowl.
The Patriots defied the statisticians. They changed history and emerged victorious, 34 – 28.
This same logic applies to financial markets. There are plenty of times in history when relying on strong historical data and trends would have left you dead wrong.
In 1989, an expert could have studied 75 years of Nikkei 225 data and correctly pointed out, “If history is any indicator of future trends, the market will not fall by 50% and stay below that halfway mark for more than two decades.” I am sure no pundit ever wasted her breath to say this, because nobody would consider losing two or three decades of market growth a remote possibility then. I imagine not even the doomsdayers would have prophesied quite so gloomy an outlook.
My point is, they could have made those claims and cited their statistics, and, based on 75 years of data, their assertions would be seen as entirely correct.
Additionally, they could have said, “Based on more than 40 years of post-war data, the Nikkei 225 will increase over any ten year period!” Again, that statement would be supported by historical statistics.
An early-1931 US economist could have accurately posited, “History suggests the market will never fall more than 50% from its high.”
They had just gone through the terrible crash of 1929. Markets had fallen roughly 48% from their all-time high. But the recovery was underway – the market was on its way back up. With 40+ years of data and one of (what was sure to be) the worst market crashes under our belts, experts could say with confidence, “History has shown us that, even in the worst of circumstances, a drop greater than 50% is not possible.”
Again, dead wrong. From April 1931 through July 1932, the market fell over 86% – totaling 89% from its 1929 all-time high – a record that took 25 more years to break!
Imagine you had invested a large lump sum in 1931 in preparation for retirement. You trusted the financial pundits’ axiomatic rhetoric – after all, they had history and statistics on their side!
Your retirement dreams shattered as the pundits shrugged and whined, “There was no way for us to know – this has never happened before!”
Using what we know from history, John (Jack) Bogle (the founder of The Vanguard Group) told CNBC on April 1, 2013:
Prepare for at least two declines of 25-30%, maybe even 50%, in the coming decade. Trying to guess when it is going to go way up or way down is simply not a productive way to put your money to work.
Bogle is the quintessential supporter of a simple buy-and-hold, low-cost, stock-and-bond strategy. He believes, like many other intelligent experts, that history proves the market trends upward. Thus an investor is best served to sit back, relax, and enjoy (read: control your emotions during) the ride.
Bogle’s point is that substantial market declines happen, but data suggest an investor should stay the course and not question. Indeed, his statistics are correct. Over 100 years of reliable stock market data prove an upward trend in the market.
This all sounds eerily familiar…
Does a relatively small historical data sample guarantee future performance?
Of course not!
Not even a 100+ year trendline.
After that 50% fall Bogle expects, how can you, Mr. or Ms. Investor, be sure the market won’t set a new record for the number of years before surpassing its previous all-time high (currently 25 in the US)? How can you be certain the United States won’t have a financial crisis with an aftermath like Japan post-1989 through today (currently around half its all-time high), or worse?
Unfortunately, you can’t know.
The “experts” can’t either, even when armed with all the statistical models money can produce.
Trends change. New realities happen, and history is made.
Trends change. New realities happen, and history is made.
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Is it unreasonable to at least acknowledge this potentiality?
I think it’s dangerous not to.
I am committed to helping people discover better ways to protect and grow their hard-earned assets. We’ll dive into specifics soon! I think the first step in preparing, however, is to simply acknowledge the potentiality discussed herein.
Challenging the comfort of the traditional investment paradigm can be depressing and stressful, but it can also put you on a path of lifelong prosperity – come what may.
Challenging investment dogma can be stressful but could put you on a path of lifelong prosperity
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