Have you ever heard this saying? Does it make any sense to you? I’ve heard it many times over the course of my life, and I’ve always had a suspicion it wasn’t true….
It’s not true. I tried it.
But perhaps the statement is of more use when applied to your investment portfolio. Why do individual investors have such a hard time making the right decisions with their money? Consider the “behavior gap” study done by Davis Advisors (below) demonstrating that — from 1991-2010 — the average stock mutual fund earned 9.9% annually, while the average stock fund investor earned just 3.8% annually. Why the 6.1% behavior gap? Individuals are watching their respective pots too closely.
We’re not talking about beating the market here — we’re talking about just keeping within spitting distance of it. And most investors can’t do it. All of this information is public, well known, and constantly discussed in the financial media. Yet, more often than not, investors continue to make decisions to their own detriment.
What does it mean to be wrong, anyway? Isn’t there an element of ‘wrong’ in every single decision an investor makes? I mean, what are the odds that you’ve bought into XYZ at the absolute lowest price it ever traded and then, by remarkable coincidence, you managed to sell it at the absolute highest price it ever traded (moments before XYZ’s entire Executive Board was accused of stock option backdating)? Does this sound like a pretty standard trade for you? If not, that means you have been wrong, on some level, by default on every single trade.
Is it ever right to be wrong?
Are you wrong when you sell out of a position a few percentage points from its top? Or when you average back into the Emerging Markets after a 20% correction to reduce your effective cost basis? Technically, yes, because you could have been more right. Are you okay with knowing that there is a little bit of ‘wrong’ in every investment buy/sell decision you make? I am. I wasn’t always, but I am today.
You see, being wrong is something I think you have to embrace if you want to be successful. It’s not that I enjoy being wrong, per se, but I have been doing this long enough to recognize that perfection is not the goal. It can’t be. If I am obsessing over the ‘wrong’ in every trade I’ve ever made, not only may I be ignoring the ‘right’ — and which is more important, anyway?? — but I may also be inhibiting myself from making sound decisions in the future.
If being wrong is right, then I don’t ever want to be….right?
If you are staring at your investment account online, hitting ‘F5′ repeatedly in the hopes that each subsequent screen refresh will bring you more satisfaction, you are more than likely going to be disappointed. It is highly probable, in fact, that what will be glaring at you is the ‘wrong’ of everything on your screen — “Yeah it’s up but I could have bought it cheaper,” or “Why didn’t I sell that one when I had the chance??” Try it and see.
“If you’re not making mistakes, then you’re not doing anything.”
- John Wooden
Replace “doing anything” in the quote above with “adding any value” and you have the dilemma of today’s investment professional. It makes all the sense in the world to be cautious after what happened in 2008-2009. [Almost] nobody would have argued with you in 2011 if you were overweight short-term bonds and cash and excluding things like small-cap stocks from your portfolios. But today you would have a lot less money than the other guy. If I’m wrong, the beautiful thing is that I get to adjust my thinking and take corrective action when it’s necessary. At the end of the day, I’ve got to make decisions — it’s what I get paid to do.
And today, is it a mistake to be buying European and Emerging Market stocks in favor of US bonds? Maybe. But it’s not one I’m going to be afraid to make.
Have a great evening!
Adam B. Scott
Argyle Capital Partners, LLC
10100 Santa Monica Blvd, #300
Los Angeles, CA 90067