You will likely make mistakes this year. Many already have, and if you haven’t yet you’re overwhelmingly likely to soon. As a Fisher Investments employee, I believe this because that’s what typically happens in investing.
Years at Fisher Investments have taught me the absolute best investors are wrong quite a lot (one reason to believe in the amazing and rejuvenating powers of proper diversification), but being wrong often doesn’t mean you can’t beat the markets consistently, or at the very least achieve your investing goals.
This is one of those perverse features of being in this business the wider world gets upside-down-wrong-way-round constantly: it’s not about being a genius (because even those are wrong a lot too), it’s about avoiding the mistakes others routinely make. If you can do that, you can be a success—no geniuses need apply.
Fisher Investments believes investing is a discipline, pure and simple and foremost. Just look at any investing periodical or website here and now or any time past: Folks perpetually search for genius stock picks, they constantly exhibit huge overconfidence in their own great ideas, and display continuous belief they somehow have insights the rest of the world hasn’t thought of. Uh-uh. No way. Just about everything you’ve ever thought of has also been thought of by someone else, and by the time you even think of acting on it someone else probably has.
I don’t mean to say markets are pure form efficient—they simply can’t be to my view. And anyway, if I did believe that I wouldn’t be working at Fisher Investments. But highly liquid equity markets are astoundingly good at reflecting widely believed information via the mechanism of prices. Which means it’s not impossible to beat the market but instead really super tough to do consistently over time.
2011 is a year where ultimately both bulls and bears are likely to be frustrated. This is market water treading time in my view—a period where larger disparity in returns between categories should roll up into what appears a fairly stagnant market. A classic pause period on the way to the latter stages of a bull market. Which means there are opportunities, and also pitfalls.
My experience at Fisher Investments leads me to believe you or someone you know will be tempted to make one of the following mistakes this year.
1. Investors remember the last two years: In a classic extrapolation of the recent past, many will believe the “all clear” bell has sounded, and markets can keep rocketing upward and place big bets on high returns. It’s my opinion investors should avoid stuff like high strike options and other contracts that can bleed you out via transaction costs. Now’s the time to start owning stocks you believe will benefit toward the end of a bull market (likely to come in the years ahead).
2. They won’t forget the two before the bull: Fisher Investments finds many can’t shake the past—still jittery and quivery about the carnage that was 2008. They thus believe the massive rally beginning in March 2009 (two years ago!) is some sort of counter-trend rally amidst a larger “secular” bear market. Secular market thinking is nonsensical and lacks discipline and got you pretty well steamrolled in the last 24 months. Anyway, if you get even just one of these so-called 20 year super-cycles wrong, you’ve basically cooked your investing goose for good. The simple, beautiful power of compounding is the thing that ultimately makes most folks rich via investing, and missing 20 years worth of a bull market would be beyond insurmountable to recover from.
3. Believe the Japanese earthquake changes things: The devastating, heinous tragedy that befell the Japanese people should not sway your investing thinking this year. Natural disasters are not a new thing, and never that I’ve ever been able to study have they derailed markets for good. My advice: don’t panic sell, or try to get too cute in times like now. By the time 2011 is over, markets most likely will have moved on.
4. Fall in love with covered call strategies: Some investors who agree with Fisher Investments’ assessment that this will likely be a flattish year may fall in love with covered call strategies. Don’t do it—over time numerous studies (and, well, general horse sense) has shown these things feel right but ultimately don’t work very often, limit your upside (another classic thing most don’t realize: markets more often run away upward from folks than down) and end up costing you a bunch in transaction fees.
5. Panic about inflation: First, based on Fisher Investments’ research, inflation isn’t yet a widespread problem in the world—in some small pockets it’s starting to show Frankenstein-ian signs of life, but that’s it. Inflation doesn’t spontaneously appear from nowhere on a global basis—there’s this metaphor stuck in our collective psyche that inflation happens like a powder keg near a spark. No. Inflation tends to gain steam like a freight train. Yes, money supply growth globally has been huge lately, but also bank lending, employment, wages, and capacity utilization are all still pretty slacked out at the moment. If inflation becomes an issue, 2011 ain’t the year to gerrymander your portfolio over it if you ask me.
6. Jump in headfirst to Emerging Markets: Developing economies are the souped-up racecars of the world right now: these nations (most folks think of China and India, but you should also expand your awareness to Latin America and parts of Eastern Europe) are producing and demanding in huge growing numbers and bolstering the rest of the world’s growth. This has been going on for some years though, and stocks representing those regions have shown it. Of course, many investors are just now “feeling comfortable” about it and upping their allocations. Emerging Markets deserve a place in your portfolio, but at this point there’s a lot of high sentiment for the category and you need to be targeted and careful—don’t go overboard here. Many will.
These are just a taste of the mistakes many investors will be tempted to make in 2011. Potential errors are legion, and our error-prone natures know no bounds. Historically, stock markets offer the highest expected returns over time, and so also the highest expected volatility—which makes discipline all the more important. Hold on to your hat, and avoid these critical mistakes this year.
Find the original blog post at Fisher Investments Investing IQ and follow me @Investing_IQ.