Chuck Jaffe: Don't be a stupid investor
BY CHARLES JAFFE Market Watch
Wednesday, December 19, 2012
12/19/12 at 3:13 AM
In nearly a decade of writing a column about bad investment ideas, I never once applied the word "stupid" to investors.
That changes today, because as I look back on the time I have spent picking on investments for being "less than ideal for the average investor," I have to confess to run-ins with plenty of stupid investors.
They were easy to spot. They were the ones screaming the loudest about the perceived insult of a "bad idea" label being applied to something they valued, dismissing it as without merit simply because it came to a conclusion different from their own.
And it's important to recognize those times when the problem isn't the investment so much as the person making it.
If there is one fundamental understanding that every average investor should have, it's this: Disagreement makes a market.
In stocks, for example, there's a seller for every buyer; while it's oversimplified to say that when one person is ready to make a purchase another has given up the same security thinking they can do better with their money elsewhere, it's important to recognize that there's an opposing side to your thinking.
Savvy investors look for and respect the devil's advocate, even if they come to different conclusions.
Average investors underestimate the downside risks, or simply don't see themselves living out the worst-case scenario.
Stupid investors refuse to believe an opposing view has any validity, and get emotional rather than analytical when their viewpoint is challenged.
They show themselves regularly; they're the ones on message boards, in e-mails, on Twitter or wherever possible, responding to an opinion opposed to their own with name-calling and insults instead of facts. They're railing about a headline without ever reading what's beneath it; they assume that their knowledge is so superior that the only way anyone could be against them is through chicanery.
Yup, I'm fat. You've got me. But I've never heard of a study showing that the weight of a money manager or a CEO translates in any way to inferior financial performance. And I can - and have - lost weight, but an investment opinion based on ignorance will be ugly forever.
We live in a world that encourages discourse but seldom encourages anything amounting to more than 140 characters or maybe a few paragraphs.
Ironically, at a time when most consumers seem to believe that the investment world is stacked against them, too many refuse to consider the investments they're making and ask, "What if I'm wrong?"
Ignoring the question or shouting down the answers is asking for trouble.
Smart investors know themselves, and their reasons for investing. They know their needs and follow their preferences with reason. They worry about how they're doing with what they own; they don't worry about how they stack up against neighbors or people on message boards or, for that matter, newspaper columnists.
They learn from others who look at the same data but come to different conclusions.
Honestly, if you're an average investor and you're not the least bit worried about your investments, you're either independently wealthy or you've got an overconfidence problem. If you have even the slightest worries, embrace the other side and learn what's stacked against you so that you can achieve and maintain a level of confidence that will take you to your financial goals.
A decade of writing about bad investment choices has made it clear that investors need to embrace the debate, find out what works for them, apply it rigorously, review it regularly and stand by it when the times test it. Anything less keeps them open to trouble.
The moral of a decade's worth of writing columns is simple: Don't be stupid.
Original Print Headline: Best advice: Don't be a stupid investor
Chuck Jaffe, senior columnist for MarketWatch, can be reached at cjaffe@marketwatch.com or at Box 70, Cohasset, MA 02025-0070.
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