STOP CHASING RAINBOWS
Human nature is a funny thing, we often want what we don't have and the grass is always greener on the other side. The investment universe is not immune to this, in fact, it is this type of emotion that can be your biggest ally or largest foe.
In my travels I attend a lot of seminars, participate in investor roundtable discussions and talk to droves of real everyday people about how they invest and what influences their decisions. Not surprisingly the largest influencers of investment decisions are the actions and words of others.
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Here are some phrases I hear often:
· My friend made a lot of money flipping houses.
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· I want to put my money in social media stocks.
· Green technology is where the growth is.
I'm not debating that these statements can be true (with certain qualifiers), I'm saying that there are no universal truths when it comes to investment vehicles. The above three examples are hot topics right now and many people have made money in them. But many more have lost money.
When investments become popular they are often overheated and may offer greatly diminished opportunity than they once did. However, people still go into them with the expectation of making money. Wall Street refers to this as The Greater Fool Theory.
As a society we want instant gratification and as a result are always looking for that get rich quick investment opportunity. This is how bubbles form and individuals can lose their life savings. Anybody looking for that would be better served going to their local casino or horse racetrack.
Successful investing requires analysis, discipline and patience. You must constantly be analyzing the risks and opportunities of each investment, defining the parameters for remaining in it, the definition of success for it and what your exit point will be on both the upside and downside. You must have discipline to stay the course when short term results contradict your analysis as well as the discipline to stick to your exit points regardless of your emotions. Nothing is more important than patience when it come to investing. Don't abandon your investment at the first sign of trouble, instead reanalyze it and make sure it still meets your parameters. Don't abandon it to chase the double your money quick investment, keep your gambling and investing separate. As always, this advice may not be for everybody.
The bottom line is:
Know who The Greater Fool is and neither become him nor rely upon him for advice.
