At the end of June, Barry Ritholz began building out a list of what he (+ colleagues and readers) views as the top 10 investor errors on his fantastic macro economics blog: The Big Picture.
The series is nearly complete – today is post #8. If you have not already been following these- take a look now, I’ll be here when you get back. The posts are short and, like the most truthful truisms, reminders of something we already know.
So far- the overriding themes have focused on human behavior, and the detrimental role that emotions can play in investment decisions.
Even post #1, outlining the fact that fees dampen investment returns, is really about emotions. Ritholz correctly notes that it is common to overlook the impact of fees, despite the fact that numerous studies and basic math show how they weigh down long-term returns. He is not suggesting that investors avoid funds with high fees, but rather encouraging readers to look objectively at them, and to factor them into overall investment decision-making with clear eyes, armed with the knowledge that forgetting about fees is the norm.
However, ignoring emotions as data can dangerous too.
Gavin de Becker, author of the powerful book, The Gift of Fear, states “Americans worship logic, even when it’s wrong, and deny intuition, even when it’s right.” The book illustrates how intuition and negative emotions can impel action that saves lives and offers strategies that help us “avoid denial, which is the enemy of safety. “
In an interview, de Becker notes the value of paying attention to what is actually happening the present moment as a way to combat denial and reduce risk. “Now is the only time anything ever happens--now is where the action is. All focus on anything outside the Now (the past, memory, the future, fantasy) detracts focus from what’s actually happening in your environment. Human beings have the capacity to look right at something and not see it... The [insight] most applicable to day to day life, even for people who are not living with unusual risks, is to be in the present.”
While an emphasis on intuition and emotion may seem at odds with Ritholz’s warnings, both authors are actually saying the same thing: the best defense is to be aware and mindful of your own biases, try to see clearly what is actually happening right now, and respond to the data.
Top 10 Investor Errors
1. High Fees Are A Drag on Returns
2. Reaching for Yield
3. You (and your Behavior) Are Your Own Worst Enemy
4. Asset Allocation Matters More than Stock Picking
5. Passive vs Active Management
6. Mutual Fund vs ETFs
7. Not Understanding the Long Cycle
8. Cognitive Errors
9. Confusing Past Performance With Future Potential
10. When Paying Fees, Get What You Pay For