Quote for the Week

One of the first lessons I heard about pendulums and the swing of investor behavior regarded something I was taught in the early 1970s: the three stages of a bull market. These succinctly capture the essence of investor psychology.

The first stage comes when a few people begin to realize that there will be improvement. The second stage occurs when most people realize that improvement is already taking place. The third stage comes when everyone thinks that things will be getting better forever. Clearly, the first is early; the last is laughably late. One of my favorite adages – perhaps my favorite of all – is that what the wise man does in the beginning, the fool does in the end. So it’s the buyer in the third stage – who buys when optimism is incorporated, under the assumption that things will always get better – who pays the price. — Howard Marks (source)

Continue Reading…

Mistakes will be made. It’s a normal part of investing. The question is what will you do when you make one and how bad will the outcome be?

Big mistakes are the issue.

An extreme example is you bet all your savings on a single stock — a tip you got from a friend. It has some early success only to tumble 30%. And this is where biases creep in to deter the best decision possible.

You’re maybe too confident things will turn around. Everyone says, “it’s due for a bounce.” All you want is to recover your losses.

So you hold on. Except, it falls further — 50%, then 70%. Finally, you give in and sell at a 90% loss.

With 10% of what you started with, you’re stuck with the incredible task of rebuilding it back up. Of course, blindly following a stock tip or betting it all on a “sure thing” are only two of a countless number of ways to part with your money. Continue Reading…

Quote for the Week

Most people think of common stocks as speculative media. They are not, in my opinion. Good common stocks are investment media which are subject to speculative influences. The speculative influences are not the common stocks; they are in the minds of the people who buy and sell them. The problem of investment in common stocks is either to insulate yourselves from the speculative influences, or else to adjust your investment policy so that you can take advantage of the speculative fluctuations that are imposed upon the basic investment quality of common stocks. — Benjamin Graham (source)

Continue Reading…