Subscribe to John Mauldin's
FREE Publication:

Thoughts From the Frontline

Sign up for John’s free weekly letter and join 1 million of his closest friends.

We will never share your email with third parties

  • Editorials
  • In The News
  • -->

    Thoughts from the Frontline

    Your Three Investing Opponents

    December 24, 2011

    Choose your language

    It’s Christmas Eve and that time of year when we start thinking about what we did in the past year and what we want to do in the next. Why do we make the mistakes we make (over and over and over?) and how do we avoid them in the future? If it seems to be part of our basic human condition, that’s because it is. Recently I have been having a running conversation with Barry Ritholtz on the psychology of investing (something we both enjoy discussing and writing about). Since I am busily researching my annual forecast issue (and taking the day off), I asked Barry to share a few of his thoughts on why we do the things we do. He gives us even more, exploring the three main opponents we face when we enter the arena of investing.

    Barry is the driving force behind The Big Picture blog, often cited as the #1 blog site in terms of traffic (and a favorite of mine!) and FusionIQ, a software service that uses both fundamental and technical analysis. Over the years Barry and I have known each other, we have become quite good friends. If you ever get a chance to catch us on a panel together, you are in for some fun, as we tend to go at it and each other just for the heck of it, while trying to share the little that we have learned along the way. Barry is all over financial TV and now has a weekly column in the Washington Post. And now, let me turn it over to Barry.

    Your Three Investing Opponents

    By Barry Ritholtz

    “Tough Year!”

    We hear that around the office nearly every day – from professional traders to money managers to even the ‘most-hedged’ of the hedge fund community. This year’s markets have perplexed the best of them. Each week brings another event that sets up some confusing crosscurrent: call them reversals or head fakes or bear traps or (my personal favorite) the “fake-out break-out”…

    Discuss This

    4 comments

    We welcome your comments. Please comply with our Community Rules.

    Comments

    Charles Breese

    Dec. 25, 2011, 8:44 a.m.

    Great article - it illustrates graphically why there is a need for advisory stockbroking, where it provides a combination of the benefits of low cost execution and a mindset suited to dealing with the issues described by Mr Ritholtz - in the UK, the regulatory regime has all but eliminated advisory stockbroking in smallcaps, an area where Mr Ritholtz describes private investors as having an edge over institutional investors (a view with which I strongly agree).

    gary legon

    Dec. 25, 2011, 5:55 a.m.

    I have been an avid reader of Barry’s “Big Picture,” since JM mentioned it a few years ago. I am constantly amazed at the amount of quality content that Barry posts.  I consider The Big Picture and John’s pieces to be indispensable resources.  They don’t make specific recommendations but they have each saved me from catastrophe by their macro insights. BIG THANKS to them both.

    Nelson Swanberg

    Dec. 24, 2011, 4:28 p.m.

    “Underperformance is not a disease suffered only by retail investors â?? the pros succumb as well. In fact, about 4 out of 5 mutual fund managers underperform their benchmarks every year. These managers engage in many of the same errors that Main Street investors make. They overtrade, they engage in â??groupthink,â? they freeze up, some have been even known to sell in a panic. (Do any of these sound familiar to you?)”

    The stock market is for suckers. The market is manipulated by the large investment firms for their own benefit.

    James Housel

    Dec. 24, 2011, 12:31 p.m.

    John,

    One of the most important distinctions each individual must make is this. Are you an investor or a trader? As a trader you will most likely have your ass handed to you on a stick for all the reasons you mention. We simply are not rational creatures (particularly in the short term). And, indeed, the “other” team is much better equipped in every way. As an “investor” however, the playing field is far more level. With modest tools, a sense of history, and, as much as possible, a dispassionate temperament…I think most individuals are capable of taking Mr. Market to the prom. Think in 5 year time horizons, recognize that you can be wrong, don’t bet the farm. With those simple rules you can place your “bets” and walk away. Come back in 5 years. Nike is the classic example. In any 6 month period you could probably have lost money in Nike. In any 6 year period…you couldn’t lose. I wrote my “partner” that unfortunately he could not say ,” Don’t worry, everything will work out 5 years from now.”

    Any success I have had as an investor has come in those time horizons. Yes, I occasionally make money in the short term (I was in and out of the CHF for a 10% gain this year), but I consider that “luck”. Buying gold in 2003 and holding…that was skill.

    I was once on the front page of the Wall St. Journal for holding MSFT from 1987 until 2000, turning 10K into 1000k. The ONLY thing the interviewer wanted to know was how i could possibly have slept at night. He was very disappointed to hear that I actually slept quite well.

    Happy Holidays and remember…fortunes are not made in days or quarters or even years…they are made in lifetimes.

    Best,

    Fred Housel