Investing is so fascinating because it’s just as much about people and their emotions as it is about the raw numbers. Sure over the shorter period – and especially over the past 4 years – everyone’s an expert. It’s critical that ALL investors have a sound investment process.
It’s good to be confident, or so all of us were told when we were young. Confidence will make whatever you want achievable. So it must be very good that I’ve been meeting a lot of very confident investors these days. I met a man who started investing in stocks only three months ago and whose investments have returned more than 25 per cent during this period. That’s an annualized return of more than a 100 per cent a year, as he proudly-and accurately-informed me. Someone else I ran into started investing in February 2004 and have more than doubled his money. He has made a very confident projection that showed how fabulously rich he was likely to be in about five years’ time.
Of course, this is not just amateur hour-professional investors too are sounding like the gentlemen above. I met the marketing chief of a mutual fund company who had many megabytes of marvelously entertaining PowerPoint slides about how his fund managers had generated great returns over the last three years. I did ask him about what their returns had been like before that but the response I got made me feel that I had said something very rude.
Welcome to the land of investing geniuses, no one in this world has made any mistake on the stock market for as long as they can remember.
This is dangerous territory. It is a fact that investment decisions made during bull-runs result in eventual disaster far more than those made when the markets are down in the dumps. This is basic psychology. Most human beings are inherently optimistic. When the markets are rising, almost every one of us likes to believe that we are making money because of our savvy decision-making.
As long as the going is good-and the going can sometimes stay good for years-almost any investment does make money. However, by the time the stage comes when millions of occasional investors are being pulled into the markets like moths to a flame, all the safe money has already been made. There was a time when there were great stocks available at value prices, but that is no longer true. There is probably still money to be made in the current cycle of the stock markets but getting this money from someone else’s bank account into your own will involve buying high and selling even higher later.
Buying low to sell higher, which allows you the luxury of buying low to sell low if things go wrong are no longer possible. As the well-known theory states, you now need to buy like a fool and hope for a bigger fool to come along later.
Does this mean that you shouldn’t invest anymore? No it doesn’t. What it does mean is that most of the stocks that the newly minted geniuses are buying are those that are being talked up by smart operators who have found bigger fools.
This is a time for caution. A time when any good investor is as mindful of his own psychological responses to the sight of others making money as he is of the moves of the market.