Clearly, you are a genius. Every investment you’ve made this year is up over 15%. Your decision to buy that [XYZ] asset was outstanding and clearly the correct decision, because the market price has gone way-way UP since you purchased it! I bet it’s tough being so smart!
Warren Buffett had better look-out, because you’re clearly gunning for the title of “World’s Best Investor”. He doesn’t stand a chance compared to your stock picking ability!
Some of your “not so great” investments are even doing pretty well. You’re still making money even though they might be trailing the S&P 500 by a little. They can’t be bad investments if you’re still making money, right?
Oh, and that PoopCoin you recently purchased? Clearly it’s going to turn you into a billionaire in a matter of weeks, because it’s only gone up since you converted dollars into this electronic currency.
The question really isn’t if you’re going to buy a super yacht. The question is, how big is it going to be?
Investing is actually pretty easy for you isn’t it?
A Reminder About Investing Hubris
Yes, I’m poking a bit of fun here at the investors wrapped-up in today’s market hubris. With the S&P 500 up another 11.7% so far this year (dividends included), it’s easy to develop a big head and think you’re pretty smart.
Trust me, it’s not smarts. Quite literally, any investment move you made this year is going to look pretty successful… the stock market is simply booming!
Don’t be fooled by the momentary success of a few investing wins, or even a few good years of returns. Those gains were not the result of your superior intellect or analytical advantage, but merely dumb luck.
That’s right, I said “dumb luck”. Most people have ZERO advantage over other investors (despite what they may believe). They are simply along for the ride like every other market participant.
As Mr. Market swings ever higher, even mediocre investments can rise significantly. This is NOT an indicator of your investing skill. Market forces are actually what’s responsible for the majority of your gains. When Mr. Market swings the other direction, you’ll begin to realize just how mediocre some of those investments are.
I’m not writing this to put anyone down of course… it’s just my way of bringing you back to Earth. Welcome back to reality.
It can be a lot of fun to see your portfolio value rising every day, but don’t let the investing gains go to your head. Stay grounded. I can guarantee that one day Mr. Market’s mood will change… and you DON’T want to be caught unprepared when it happens!
Studying The Ruins Of Investing’s Past
If you take a look at back at the history of manias and panics, there were three major mistakes that ruined investors throughout history:
1. Using leverage (debt) to “enhance” returns. Excessive leverage when the market finally turned was enough to ruin many investors, and send them jumping off buildings.
2. Investors actively traded in-and-out of investments, in the hope of realizing gains from market timing. (Instead of just holding high quality assets.) In the short term this seemed like a successful strategy, but eventually mistakes were made. The unlucky investors ended-up buying at the peak of the bubble, and never recovered their money.
3. Investors were overconfident, and got wrapped-up in market mania (believing they couldn’t lose). They invested money they shouldn’t have… money needed for living expenses, paying off debts, or other business obligations. When the boom ended, it created great financial pain.
On the surface, all of these mistakes seem like easy lessons to learn, but they’ve been repeated so many times throughout history.
Why is that exactly?
In my opinion, it’s because investor’s memories are exceedingly short. This can be attributed to something called the “saliency bias” — The tendency to focus on prominent near-term events and emotional current news, rather than events in the past. Memories and emotions tend to fade, and investors will forget the panics and the crashes from only a decade back.
Our brains like to focus on the here and now.
Take for example, the Covid-19 pandemic crash of 2020. It is now but a distant memory…even though people were freaking out, selling stocks, and buying up every scrap of toilet paper in-sight. This was only a year ago. Where is that fear today?
Thankfully, the economy bounced back quickly and things are booming once again. All that stimulus cash and a recovering economy should keep the stock market booming for years (Or so the thinking goes)!
Let’s not forget the Great Recession either! Even though it was a mere 12 years ago, that levered housing frenzy is now just a storybook fairy-tale. Nobody is worrying about paying too much for a house today, yet this was a real problem back in 2009.
And what about the Dot-Com Bubble? Does anyone remember that? The blow-up in tech stocks is now ancient history for today’s investors.
Be Careful Out There
I don’t mean to be negative, but there are very few investors right now calling for “caution”. Despite the fact that stocks are priced for perfection. There’s far too many social media voices bragging about their most recent investing wins in meme stocks, or whatever electronic currency happens to be popular this week.
It can’t be healthy for this many novice investors to think they’re investing super-geniuses.
Be wary. Investing is often fashionable. Without even realizing it, we can get caught up in the current manias and panics of the day. Keep a level head and avoid overconfidence. Instead, take the time to remember the difficult investing lessons from the past. Avoid leverage, and simply hold high-quality assets for the long-term.
Do that, and it won’t matter if today’s investing fashion is in tulips or electronic currencies. You should do just fine!
[Image Credit: Flickr]