Saturday, September 11, 2010

Why do successful people fail in the market

I view myself as a fairly successful human being as far as society defines "successful". Graduated college, have a job, no debt, have my 5 basic needs (there are 5 right?) etc. So why is it successful people have such trouble investing? I'm not implying I'm successful in the market, but in my attempt to become successful I'm looking at what other people do wrong and I try to do the opposite. If that is combined with trying to replicate what others do right, the odds of success should be pretty good...theoretically. Afterall, if 5 years of failure while learning allows me 30 years of success, I think I can live with that.

There are lots of theories about why investing is difficult. Why can the average, or even above average, professional be a below average investor? My opinion is this: in a "typical" career, work is given and one uses current information and current and past knowledge to complete the present task. The keyword here is present. Results are (relatively) immediately seen. When investing, current information and current and past knowledge is used to predict the future direction of a company. Immediate results are not seen which is completely contrary to what everyone is so used to when putting work into anything. Not to mention no matter what the available current information, the future will always hold things one cannot possibly know ahead of time. Let's face it, human's just aren't that great at predicting the future. Combine that with the fact that there are a lot more shitty companies than good ones, it makes it pretty evident why people have so many problems. The conclusion I have drawn from the above is this -- everyone is so used to seeing immediate results, that when they have to wait to see them, they are immediately convinced something is wrong. It's what their job tells them, it's what society tells them (if you aren't doing x or y or z at time a b or c in life, somethings wrong) and that is the battle each person fights when the longer term market crosses paths with the immediateness of every day life.

These posts are not meant to be taken as investment advice. Everything written is solely the opinion of the poster.

1 comment:

  1. Another thing that controls people's investment decisions these days is fear. Since the crash, "buy and hold" is no longer a great guideline (if it ever was), and many are apprehensive that we'll have a double dip recession domestically that depresses international markets,too.

    One investment I made that I sold out of fear was the Fairholme Fund (FAIRX), managed by Bruce Berkowitz. I liked Berkowitz' style--modeled after Buffett's, he looks for companies that have a ton of cash on their balance sheets and double-digit free cash flow yields. He also goes with Buffett's goal to be approximately right rather than precisely wrong. So I bought FAIRX in January 2009 for $23.00 and saw it rise to $28.86 by September 2009. Then I thought to myself, "Oh no! I'm sitting on an 18% gain and September is a historically bad month for the market. It may crash again!" I sold my shares in FAIRX and saw it rise to its current price of $32.44.

    Interestingly, I just read an article in Morningstar called "The Funds that Got Away and Why You Should Let Them Go." It mentioned the Fairholme Fund as one that investors should just forget about because that ship has sailed. But actually,there's been a 10% pullback in the share price of FAIRX over the past few months, and I see this as my chance to do what I should have done in the first place: Buy the fund and place some trust in Berkowitz for the long term.