The Two Biggest Mistakes of the Individual Investor

Part of our business is advising individual investors.  When we talk with them, we try to get them to focus on two big mistakes.

  • Chasing performance.  This applies to those who are active investors and traders.  We have written about this on several occasions, and encourage readers to review these posts.  There is a new piece of evidence from Mark Hulbert.  We admire Hulbert as an entrepreneur.  He saw a market — the analysis of investment newsletters — and built a business based upon analyzing the recommendations of investment gurus.

Most investors start with the question "How have you done this year (or last year, since we are just starting 2007).  If they are looking at investment newsletters, they look for the hot hand.  Mark Hulbert’s recent article on this subject shows the fallacy of this approach.

  • Asset allocation.  Many investors gave up on U.S. equities after 2001 and plunged into real estate.  It is time to re-examine the balance of portfolios.  Our series on stock valuation (especially here and here) highlights this choice.

We believe that the best opportunities in stocks are in those that have lagged in performance due to the Misguided Gloom
about earnings, the economy, and the Fed.  Some of the key stocks have
built better businesses, better balance sheets, and better earnings for
several years — yet the stock price has not reflected the true

Seizing opportunity means looking forward.  The best opportunities come when sentiment is excessive, as it is now.

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  • Larry Nusbaum January 31, 2007  

    “Asset allocation. Many investors gave up on U.S. equities after 2001 and plunged into real estate.”
    And, what an incredible run it has been…..especially for the little guy! Now, just remember, real estate has 5 major sectors with housing being only one.
    Here is my own Mistake Investors Make: Thinking that the opportunities in real estate have passed.

  • David Merkel February 3, 2007  

    You are dead right. Over at, I spend a decent amount of my writing time telling people to consider risk first in their investment plans. Aside from that, I tell them to diversify internationally, buy bonds, and that cash is valuable.
    The trouble is, people are motivated by fear and envy. They avoid asset classes when they are bottoming because of fear, and buy asset classes near the top because they envy those who have made money there, and they want to do it too.

  • The Big Picture February 4, 2007  

    SuperBowl Linkfest!

    Heckuva week, Bernie! The Fed held interest rates at 5.25%, igniting a powerful rally. Economic growth looked better, and while energy prices rose 6.5%, the Fed said inflation remained contained. The SP500 had its best week in six months, up 1.8% (6-ye…