Saturday, June 27, 2015

WHY INVESTORS FAIL ....

 Courtesy :Oddball Stocks.com

Written by : Mr. Nate Tabik


Almost every investing study tells us that buying stocks at a low price to anything results in market beating performance.  Even just buying a S&P ETF and doing nothing else beats most investors and mutual funds.  If out performance is a matter of doing a few simple things and nothing else then why is everyone acting so crazy? And if earning market matching, or market beating results are so simple then why don't investors earn those sorts of returns?
Fidelity released a study discussing a performance breakdown for their accounts.  The clients that did the best were the ones who were dead.  The second best performing set of clients forgot they had Fidelity accounts.  It seems like a formula to beat the market is to start an account, forget about it, then die.  Your heirs will thank you and marvel at your investing prowess.

How is it that investing is so "easy", yet so hard?  If in theory all one needs to do is follow a few simple formulas, or invest in a few ETF's why aren't more investors matching or beating the market?

It's often said that investors are their own worst enemy.  Our own emotions get the best of us.  When the market is roaring higher we get excited.  When the market hits new lows we're too depressed to even open our account statements.

I believe investors fail for a number of reasons with the biggest being the lack of patience.  There are many investing strategies that make sense on paper.  The problem is few investors have the patience to see these strategies through to the finish.  It is more exciting to watch a stock jump up and down 2-3% a day, or see a battle ground stock bantered about on CNBC compared to owning a company that trades in tenths of a percentage point most days.  The thing is those tenths add up over time, especially for companies that continue to execute operationally.


Finding a reasonable investing strategy isn't an issue, it's sticking to it.  It is very easy to find undervalued investments, but holding onto those undervalued investments for years can be difficult.  For many investors it's fun to research and watch holdings, but it's no fun to watch a stock effectively do nothing for days, months, or years.  If the excitement is in the research then we'll continually be researching new positions and throwing out the old ones.

Another reason investors fail is because they're doing too many things at once.  A few net-nets, a few growth stocks, some shorts, a turnaround or two etc.  Their portfolio is a potpourri of strategies, many of them that are complex and require dedicated skills.  Each investor needs to find their own style and stick to it.  There is a reason there are so many funds with one focus.  It's much easier to be a bankruptcy fund, or a turnaround fund compared to a general value fund.  The same is true for individual investors.  It's much easier to focus on a specific corner of the market rather than invest in any and all things cheap.




Related to doing too much is researching too much.  Some investors fail because they can't see the forest through the trees.  They are so caught up in the minutia of an investment that they miss the big picture.

I enjoy reading message board posts related to investments I'm researching.  I'm always on the lookout for what I consider the obsessive investor.  For some reason these obsessive investors often congregate in oil and gas or mining stocks.  You've probably seen these posts.  A few books worth of material detailing the pressure of well bores the company had in North Dakota in 1988.  Excited posts about how rumors are swirling that carpeting is being replace at headquarters and maybe it's a sign of a buyout.

Buried within the pages of notes are usually a few nuggets of information useful to an investment thesis.  But my feeling is that the author probably has no idea, they are too consumed with finding out everything related to the company to realize this.  The ultimate irony is that the body of knowledge an obsessed investor can accumulate is about the minimum amount of knowledge every middle level employee at the company has.  In other words outside investors are always at a significant informational disadvantage to almost any company insider, even the lowest level employees at times.



My favorite investments are ones where the value is obvious and the investment rests on what I consider a few pivot points.  These are general assumptions.  The larger the gap between the current price and fair value combined with a small number of pivot points makes for investment success.  This is because each assumption, each estimation, and each guess adds uncertainty to a model.  At some point endless research can blind an investor from realizing what truly matters from what they think matters.

Once I realized that I didn't need compile an exhaustive list of company information to make good investments I began to simplify my research.  I only researched what was necessary to confirm or deny the pivot points I'd identified with an investment.  By doing this I saved myself the endless research.  Maybe the carpet color does matter in a merger.  Small details can be exciting.  But it's the boring details that matter, such as the age of the CEO, or the age of the Board.  Companies with graying executives and graying boards are more likely to sell their company.


The last reason I believe many investors fail is because they don't really know what they own, or why they invested in the first place.  Cloning investments is a very popular strategy right now.  And like all investment strategies cloning works well on paper, it generates market beating returns.  Just buy what Buffett buys and sell what he sells and you'll do well the story goes.  The problem is when we buy something on someone else's thesis it's hard to hold through thick and thin.  If bad news starts to come out on a cloned investment it's easy to dump it and say "maybe this is one the guru messed up on."

Closely related is when investors purchase stocks on a story basis.  That is they feel a given company will benefit from some larger trend at some point in the future.  Many times when these story stocks are purchased investors aren't conducting true due diligence to see if the company will actually benefit from the trend.


Story stocks are a favorite of the news shows.  There's a very specific reason for this.  There are two types of stocks, stocks that are great stories, and stocks that are great investments.  As someone who writes about stocks I can say that some of my best investments have been my worst posts.  This is because there was nothing exciting to write about.  There was no narrative or story around the stock.  It was cheap, and all an investor needed to do was purchase and wait.  Some of my best and entertaining posts have been about stocks that aren't necessarily great investments.  But they make great stories.  This is the same with the financial media.  Companies that make great stories aren't usually great investments.

When we look in the mirror we're facing the enemy of our returns.  The best course of action is to pick a strategy, stick to it and move on.

39 comments :

  1. Sir nice article for all long term investor.like to read ur post not just saturday but all through t week about ur comments on all query by our friends.god bless u thanks

    ReplyDelete
  2. When you had recommended mic at 4, people were not convinced,now at 17 they are much convinced and bullish.Don't you think same is happening with Pantaloon ,they are not convinced at 180 less than your recommended price but will start buying at more than 3 or 4 times from current price.

    ReplyDelete
  3. Hi VP Sir , Having a Sip of Coffee while reading about great investing strategies are so refreshing on Saturday morning and feels great.

    ReplyDelete
  4. Sir ur view on UFLEX and SCHNEIDER ELECTRIC

    ReplyDelete
    Replies
    1. Not tracking Uflex

      Schneider

      http://value-picks.blogspot.in/2012/03/schneider-electric-infrastructure-ltd.html

      Delete
  5. Superb Sir, Your articles are unique and very helpful . Appreciate. Thank you.

    ReplyDelete
  6. few points from my end

    1) never look at market index when you are investing . always look at companies and its execution for its product. Then look at the price what you want to pay and what value it can go from its execution of business.
    2) never look for beating the market
    3) ask yourself why you need to invest in the company ? and how much % of return are you expecting with the companies future growth
    always put the estimate of fair value dont dream that all company will be google and apple in their field.

    ReplyDelete
  7. wow great article sir once again. now the mantra should be changed from"buy right and sit tight" to "buy right and forget"

    ReplyDelete
  8. Sir, you have never recommended banking Stock. I have Canara Bank in my Portfolio. I think this is most cheapest PSU Bank and have good dividend history. Can you express your views on this.

    ReplyDelete
    Replies
    1. Never ? . Suggested Yes bank more than once

      Delete
  9. Very detailed and informative article sir. It has logical explanations to all the reasons. Thank you very much sir.

    ReplyDelete
  10. Dhananjay BaranwalJune 27, 2015 at 1:14 PM

    Once again a mind blowing article.Really it is very tough to control the emotion when one see the stock price appreciation and tempted to book the profit.After one or two year he or she realises that the "bus" has been missed.Trying to follow yor message.
    Thanks and regard.

    ReplyDelete
  11. Good Information has Shared in This Article For Traders And Investors . Thanks Mr. Nate Tabik ji..

    ReplyDelete
  12. Excellent article sir. Teaching deeply about 'sitting tight'. Hearty thanks sir

    ReplyDelete
    Replies
    1. Entire credit for this article goes to the original author .Name of him mentioned at the beginning itself.I just shared it.

      Delete
    2. Dhananjay BaranwalJune 28, 2015 at 2:31 PM

      This shows your standing on a platform consisting of very high degree of moral and ethical value.

      Delete
  13. Dear VP Sir,

    Please share your views on Chaman Lal Seti Exports, Veljan Dension and Dhanuka Agri Tech.

    thanks
    Srini

    ReplyDelete
    Replies
    1. Chamanlal Setia and Veljan are already suggested stocks and not tracking Dhanuka

      Delete
  14. Hello sir, thanks for the sharing the article, can you advise regarding kovai medical can it become a multibagger due to their new expansion plams . Thanks hrithik

    ReplyDelete
    Replies
    1. Kovai Medical is a stock already suggested @ Rs.114. It already turned as a multibagger for my old readers which is now trading above Rs.630.

      http://value-picks.blogspot.in/2011/08/kovai-medical-center-hospital-ltd-buy.html

      Delete
  15. Hi ur opinion on dcb bank.excellent management can it become a multibagger

    ReplyDelete
  16. Dear Sir, What is your view on Subex and Cybertech.. Lot of being hered about subex being a turnaround story.. Would appreciate your views...

    Regards,
    Imran

    ReplyDelete
    Replies
    1. Positive on Subex , not strictly tracking Cybertech

      Delete
  17. Dear sir
    I have a general doubt a compan trading at rate of 500 with face value 10. The company goes for split of 1: 10 face value becomes 1re and company share price become 50 re. After few yes the stock price raises to 500re. And if the company decides to do stock split is t possible or wat the company will do under those circumsstances..

    ReplyDelete
    Replies
    1. To my knowldge , as per present laws not possible to reduce FV below Rs.1 in india

      Delete
  18. Dear VP
    One of your recommedations in 2010 is Pioneer Investcorp. You recommended this scrip when it was quoting around Rs.52. Now the share price is Rs.32. Whats your opinion about this share now. Can I enter at this point in time.

    ReplyDelete
    Replies
    1. Post recommendation , company sold a portion of their business and at present not tracking it

      Delete
  19. Execellent write up by author reading the truth and thanks for sharing!
    Sir, your view on Orchid chem, sound management and saddled with debt...

    ReplyDelete
    Replies
    1. No change in previous view on Orchid

      Delete
  20. Sir ur current view on associated alcohol and tilaknagar industries

    ReplyDelete
  21. Sir,
    Plz share or views on tanla solutions if u r tracking it

    ReplyDelete
    Replies
    1. Subex , Tanla, Orchid , MIC ..etc are potential turnaround candidates .

      Delete
  22. such a nice lesson of stock market I learnt today form you thanks for nice posting..
    Stock future tips

    ReplyDelete
  23. sir,
    I want your valuable advise regarding Hyderabad Industries Ltd (HIL)

    ReplyDelete
  24. Sir
    Please share views on jaiprakesh association???

    ReplyDelete
  25. Dear Sir,
    Many thanks for replying.. Your views means a lot for me.
    Regards,
    Imran

    ReplyDelete
  26. Sir,

    I have bought 1000 qty of JP associate @41 price. now its almost <12. What is your opinion?

    ReplyDelete

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