In the Investment World, You're Probably Your Own Worst Enemy
Jan 22nd 2013 5:00PM
Updated Feb 1st 2013 4:20PM
Sure, the business world is full of examples of greedy executives taking advantage of shareholders for their own personal gain. As a part owner in a business and as a human being, you should rightly be outraged when such behavior is displayed.
But even though such malfeasance creates lots of headlines, that usually isn't what dooms most investors. The cause, dear Fools, is usually found within.
We know that buying low and selling high is the simple metric for financial success, but we often don't consider what that really looks like in the real world.
It means buying a company when it is completely out of favor, and deciding to part ways when everyone wants a piece of the action. It means tuning out the investing crowds, and being comfortable making one decision when everyone else is moving in exactly the opposite direction.
In reality, there might be nothing more difficult than making such decisions -- our hard-earned money is what's on the line.
Don't believe me? Here are a few examples...
Between 1977 and 1990, Peter Lynch ran the Magellan Fund for Fidelity Investments. Over the course of his tenure, he accumulated some of the most astounding long-term results in the history of investors. Over those 13 years, his funds averaged a 29.2% return per year!
Think about it: A $10,000 investment in 1977 ended up being worth almost $280,000 in 1990. His investors must have all benefited from such investing acumen, right?
In fact, the average return for an investor in the Magellan Fund over those years is reported to be in the single digits. Investors would buy when the fund was doing well, and sell when it was doing poorly. So although the fund did well overall, individual investors did not. And investors had no one to blame but themselves.
Another poignant example would be the most popular stock of the last decade: Apple . Back in 2000, I distinctly remember one of my more technologically inclined friends telling me that he thought the company would be doing great things "now that Steve Jobs was back in charge."
"Yeah, right," I thought. Everyone knew the PC was better than any Mac.
Buying in at the opening 2000 price for Apple's stock would have returned 1,700% for me -- a yearly increase of almost 25%!
But at the time, there was no way I was going to make that move. It went completely against conventional wisdom.
Becoming more self-aware
Of course, any investor who shunned Apple back in 2000 like I did probably failed to check under the hood and make a decision based upon what he or she -- and not the talking heads on TV -- believed. They didn't take the time to write down their reasoning, or make a decision for themselves.
In large part, that's because we -- as humans and investors -- are subject to a wide range of biases that can have negative effects on both our investments and our lives. Award-winning Fool Morgan Housel highlighted these errors in thinking back in October.
Over the coming days, I'll be covering eight such biases. I've listed them below. As each article is published, we'll add the link below so you can click on it to read up specifically on these biases.
- Confirmation bias
- Recency bias
- Backfiring effect
- Framing bias
- Skill bias
- Hindsight bias
- Escalation of commitment
In the meantime, if you'd like to read up on whether Apple is a good investment now, we have just the thing for you.
In fact, there is a debate raging as to whether Apple remains a buy. The Motley Fool's senior technology analyst and managing bureau chief, Eric Bleeker, is prepared to fill you in on both reasons to buy and reasons to sell Apple, and what opportunities are left for the company (and more important, your portfolio) going forward. To get instant access to his latest thinking on Apple, simply click here now.
The article In the Investment World, You're Probably Your Own Worst Enemy originally appeared on Fool.com.Fool contributor Brian Stoffel owns shares of Apple. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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