I wrote this a decade ago, and if you keep only one resolution this year, this is the one it should be. It will open a cascade of improvements for your finances . . .
Take Responsibility for Your Stock Losses
RealMoney.com, April 12, 2005
“He who blames others has a long way to go on his journey. He who blames himself is halfway there. He who blames no one has arrived.”
— Chinese proverb
In the first installment of “The Apprenticed Investor,” we discussed why investors should expect to be wrong, and most importantly, having appropriate plans for what to do when you are wrong.
That column gave you two lessons disguised as one. Hidden within was a second, subtler message. It is so obvious, yet so ignored by investors: You are ultimately the only person responsible for your investments.
Apprenticed Investor: Take Responsibility for Your Stock Losses
That sounds pretty straightforward, but for some reason it seems to be a problem in our society. Few want to take responsibility for their actions or situation, if they can avoid it.
Think I’m exaggerating? Every kid who does poorly in school gets diagnosed with ADHD. We are fat because of McDonald’s (MCD). There are shootings because of TV violence.
In sum, it’s easier to pass the buck than to admit the truth.
Bad Excuses for Poor Investments
At times, the excuse-making from investors is even worse. Over the years, I have heard every complaint imaginable for why losses occur. Inevitably, these gripes go something like this: “It’s not my fault but the fault of”:
The analyst analyst who recommended it.
The banker who did the deal.
CNBC, which hyped it.
The talking head who loved it.
My brother-in-law, who got a hot tip on it.
I’ve heard people complain about their broker’s broker bad advice, the lousy execution they got, and how a market maker market-maker or specialist specialist hurt their trade. Other kvetches? Management stinks, insiders insider-trading are dumping shares, regulators are overzealous. Margin calls margin-call did it. Or was it the president’s policies or congressional gridlock or Chinese imports? Really, who can trade when the economic data are cooked, and the “Plunge Protection Team” counters your best positioning?
I’ve overheard people complain that they lost money because Alan Greenspan raised, lowered and/or left rates unchanged. Oh, and Eliot Spitzer, too.
Well, folks, I’ve got some bad news for you. None of those are the reason any of you lost money. The dirty little secret is much simpler. You lost money because you bought a stock, and that stock went down, and then you sold it. Period, end of discussion.
Buying high and selling low is a lousy investment strategy. Worse is buying high and not selling at all as (paper) losses mount. Think of Lucent (now Alcatel-Lucent (ALU)) or Sun Microsystems (JAVA) or Nortel (NT), or the slew of stocks that went to zero. Too many people rode ’em all the way down, rather than admit a mistake and take responsibility.
You see, with responsibility comes a natural tendency toward planning. If you buy without a plan in place for when things go south — when your original thesis turns out to be wrong — then you are at fault.
Sorry to be the bearer of this bad news, but the sooner you start accepting that simple truth, the better off you will be.
Why? Because all of the excuses above are foreseeable events that only investors (and fools) fail to anticipate. Analysts can be wrong, TV is about ratings, insiders sell, and talking heads talk. Is that a surprise? Hey, guess what? The Fed federal-reserve-system raises and lowers rates, the FDA pulls drugs, and attorneys general prosecute.
Review some of the aforementioned complaints, and you will see how foolish they sound. Now try this one: I lost money because I made a bad investment. I lost a lot of money because I made a bad investment without a contingency plan for when things went wrong.
Here’s the only excuse I would accept from an investor: Aliens from Alpha Centauri landed on earth and gave a huge technological secret to the rival of the company whose stock you own. OK, when that happens, you are excused. Short of that, everything else is your own responsibility.
Priorities and Homework
Excuses are just a sign of how lazy we all are (me too), including boredom and procrastination (guilty). If we are going to be investors, then we must do all the heavy lifting that’s called work. If it were easy and painless, then everyone would be a fabulous and wealthy investor. But it’s not, so you have to outwork and outhustle the next guy.
Recall that Michael Jordan didn’t initially make his high school basketball team. After that, he swore he would never be outworked by anyone ever again. He went on to become the greatest player ever. There’s a lesson in that.
We all know guys who can recall every baseball stat of their favorite team off the top of their heads; win-loss records, slugging percentage, ERA. Ask them about the top five holdings of their mutual funds mutual-fund, and they look at you as if you have two heads.
Some people spend more time investigating the purchase of a refrigerator than they do a stock or mutual fund. You have to wonder why people put more time into planning their next vacation than they do their retirement. A vacation is two weeks long; a retirement can be 20 years. There is something wrong with the math here.
The Freedom of Responsibility
Not to get all Zen on you, but once you accept this, there is a certain exhilaration in the concept. Suddenly, planning for your own retirement takes on a different hue. You become more focused, motivated and excited about learning.
Short cuts (i.e., stock tips) make you laugh. When other traders whine about their bad luck/the Fed/market makers, you can snicker to yourself at how they are fooling themselves.
As the magnitude of the awesome responsibility of taking control — and responsibility — sets in, it tends to sharpen the mind. It is empowering.
I think Spider-Man may have gotten it backwards: With responsibility comes great power.
This column was originally published on April 12, 2005.