Why Investors Fail

This week I am in South Africa and am not as connected as I would like to be due to meetings and slow Internet, so we are going to look at some material from my book, Bull's Eye Investing, which I think is more pertinent than ever. And since lately there has been rather large growth in the readership, there are a significant number of new readers for whom this material will be fresh. When I originally wrote much of this, the markets were coming out of the bear phase of 2001-2. I am adding a few comments in [brackets]. I trust you will find value as we look at the problems that investors face in the struggle to maximize portfolio value.

Like all the children from Lake Wobegon, I am sure all my readers are above-average investors. But I am also sure you have friends who are not, so in this chapter we will look at the reasons why they fail at investing, and how they should analyze funds and determine risk. Hopefully this will give you some ways to help them. I will show you a simple way to put yourself in the top 20% of investors. This should make it easier to go to family reunions and listen to your brother-in-law's stories.

A big part of successful Bull's Eye Investing is simply avoiding the mistakes that the large majority of investors make. I can give you all the techniques, trading tips, fund recommendations, forecasts, and so on; but you must still keep away from the patterns which are typical of failed investors.

What I want to do in this section is give you an "aha!" moment: that insight which helps you understand something about the mysteries of the marketplace. We will look at a number of seemingly random ideas and concepts, and then see what conclusions we can draw. Let's jump in.

Investors Behaving Badly

The Financial Research Corporation released a study prior to the [2001-02] bear market which showed that the average mutual fund's three-year return…