It’s easy to feel like a good investor in the midst of a bull market. Pick nearly any investment you like and as long as there isn’t something terribly wrong with it, the stock will probably go up.
For most investors, it’s easy to feel like a genius when all the facts point toward you having “the midas touch” when it comes to stock investing. Like the myth of King Midas, everything he touched turns to gold but this eventually became a curse.
Let’s get real here — The bull market has now lasted nearly 9 years, one of the longest in recent history. Frankly we’ve all been really lucky to have such great market conditions. Most investors are probably in need of a good dose of humility to get our heads out of
our asses the clouds.
This year alone the S&P 500 is up 5.1% as I write this, and my own portfolio is up about 8.5%. It’s easy to feel smart… and that’s dangerous.
Personally, I’m a big believer in humility. There’s far too many arrogant people in the world who believe they’re something special. I have no desire to be one of them.
So, today’s post is all about reminding myself (and you) to stay humble — This market could be extremely overvalued, and stocks could in-fact be entering a long period of stagnation. One that could last for a decade.
Despite bull market performance telling me I’m doing great, I could in-fact be a really bad investor.
In the spirit of humility, today’s post is a slap across the face and a bucket of cold water on those stock market daydreams. Sober up investors! I give you 7 Ways You Might Actually Be A Really Bad Investor…
1. You’re Trying To Predict The Future
Most investors buy a stock or invest in a ETF with the expectation that it’s going to go up. This in itself is a prediction of the future. Maybe you believe that Amazon is going to kill all brick and mortar retailing, or perhaps you think Tesla is going to destroy the market for gas-powered vehicles in 5 years. Whatever the case, this is a prediction of the future.
If there’s one thing people often get wrong, over and over again, it’s predictions of the future. Humans are notoriously bad at it.
I hope your crystal ball is better than mine, because I’m still waiting for my flying car!
2. Chasing Yield Is Going To End In Tears
Dividend investors love to pick stocks with high dividend yields to get that sweet-sweet income. Dividend income is one of the ways I was able to reach financial independence, and it seems like easy money when the economy is really good. High yielding stocks can generate A LOT of income.
But there is such a thing as too much of a good thing.
Frequently the companies with the highest dividend yields also have the highest payout ratios and the worst financial positions. When a recession finally hits, these high yield companies are the most likely to run into trouble and the first to cut dividends.
And that’s a recipe for underperformance. Don’t say I didn’t warn you when you’re crying your eyes out after that massive dividend cut.
3. You Might Be Paying Way Too Much For Growth
Growth stocks always sell at a premium compared to stagnant companies or those on the decline (*cough* GE *cough*). The higher the growth rate, the higher the premium the investor pays.
The thing is, growth investing is like a game of musical chairs — most of us have no idea how big that growth stock is going to get, and when the growth music finally stops… disaster happens.
Facebook’s recent performance (or should I say underperformance?) is a perfect example of what happens when investors realize they’ve been paying too large a growth premium.
It’s often the case that the higher the price you pay, the lower your long-term returns. That growth premium could actually be hurting your returns.
4. Buying Bonds Could Be A Bad Idea
So the stock market is at all time highs — If you’re the kind of investor that wants to take advantage of the market’s natural cycles, you might then be thinking about selling stocks and moving money into bonds.
Nothing wrong with locking in some profits, right?
On the surface this sounds like a good idea (bond’s are supposedly safer than stocks), but this could ultimately be a bad idea. Why?
You see, bond prices move inversely to interest rate moves. When interest rates fall, bond prices rise. When interest rates rise, bond prices fall.
And the Fed plans to keep raising rates this year.
That said, bond investors do have a couple things going for them — First, the interest received on those bonds could offset any losses from falling bond prices. (In this case, wouldn’t it make sense to just hold cash instead?)
Second, if the investor purchased the bond at or below par value, the price swings mean very little if the bond is held to maturity. In the short term the price may fluctuate wildly in response to interest rates, but over the long term the bond will be redeemed at par (returning the investor’s original investment).
So be wary as a bond investor! Patience and good purchase prices are important — without these qualities inflation and rate raises can destroy expected returns.
5. Do You Have The Investor Disease?
Do you have the investor disease? I like to call it short-term-itis. If you find yourself buying and selling a stock in a span less than five years, you probably have short-term-itis. The temptation to take advantage of “short term” gains or losses can be a big one, especially for investors with deep knowledge of a particular industry.
Short term trading means higher trading fees, and usually lower performance. History has shown that really good stock returns come from holding stocks over very long periods of time.
That attempt to lock-in gains or avoid losses could ultimately be harming your returns instead of helping — You might be selling far too soon and missing out better long-term performance.
6. Share Buybacks Might Be Fool’s Gold.
When companies announce big share buybacks, investors cheer the news and the shares usually rise, right?
On the surface this might sound like great news, but many Fortune 500 companies also issue new shares on a regular basis to award employees and executives. Those share issuances can sometimes be so great that the number of shares outstanding actually grows in a given year (despite the share buyback).
Really good stocks have a habit of keeping share/option awards under control and buying back shares regularly to reduce the outstanding share count.
7. Global Diversification Might Just Be A Waste Of Money
Do you stache most of your cash in index funds and then find yourself investing in something much more unusual to get a little “Global Diversification”? Well, you might be wasting your money.
Instead of paying 0.1% in fees for a basic index fund, at minimum you’ll be paying fees twice as large (or higher) to own a “Global” fund. That’s a high price to pay just to own a few stocks listed on non-U.S. stock exchanges.
What if you only owned the S&P 500 index? How much global diversification would you have? The largest firms in the S&P 500 index are already major global companies. In fact, the companies in the S&P derived 45% of their sales internationally and 55% domestically.
That’s a considerable amount of global diversification without paying for the high fees of a “international” fund. You’ll end-up owning many of the same stocks too!
While you could actually be one of the world’s best investors, most of us won’t turn out to be more than average (by definition).
Don’t convince yourself that you’re a special snowflake. The good performance we’re seeing today could simply be luck. Don’t let it go to your head. Hubris is a terrible trick played on investors by powerful bull markets. This leads to arrogance and overconfidence in our abilities.
Never have I heard those qualities listed as requirements for being a really good investor. Patience, humility, intelligence, and caution are qualities that will serve you well instead.
So today I’m going to leave you with the same advice I’m giving myself when the bull market keeps raging ahead — Stay Humble. This too will pass.
Eventually the bull market will transform into a bear market and many of the “smart investing moves” we’re making today could turn into small financial disasters.
Good luck out there!
[Image Credit: Stock Market Bull]