The Little Book of Bull's Eye Investing: Finding Value, Generating Absolute Returns, and Controlling Risk in Turbulent Markets

Chapter Five

Investors Behaving Badly

Failure to Analyze Risk Is a Losing Strategy

LIKE ALL THE CHILDREN from Lake Wobegon, my readers, I am sure, are above average. But I am also sure you have friends who are not, so in this chapter we look at why they fail. Perhaps this will give you a way to help them.

I’ll also show you a simple way to put yourself in the top 20 percent of investors. This should make it easier to go to family reunions and listen to your brother-in-law’s stories.

A key part of successful Bull’s Eye Investing is simply avoiding the mistakes that the majority of investors make. I can give you all the techniques, trading tips, fund recommendations, forecasts, and so on, but you must still keep away from the habits that are typical of failed investors.

What I want to do in this chapter is give you an “aha!” moment, an insight that helps you understand part of the mystery of the marketplace. We look at a number of seemingly random ideas and concepts and then see what conclusions we can draw. Let’s jump in.

Chasing Cars

The Financial Research Corporation (FRC) released a study in 1999 prior to the current bear market (www.frcnet.com/mutualfunds.html) showing that the average mutual fund’s three-year return was 10.92 percent, while the average investor in those same periods gained only 8.7 percent. The reason was simple: investors were chasing the hot sectors and funds.

According to Jeffrey A. Dunham:

• The study found that the average stock holding period was around ...