Many investors don’t enjoy investing; don’t have the time for it or don’t feel they are particularly good at it. It is this type of people who searches for an adviser to alleviate the burden – to show them the way. Unfortunately, as many advisers make the same mistakes individuals often make. Written by the #1 independent financial adviser in US (IFA) – Peter Mallouk distilled the various philosophies and case studies of the top 5 mistakes all of us made in the search of a better way to invest. In his simple conclusion – it is not because of the markets, but because of individual’s or his/her adviser’s own mistakes. These are the mistakes even the greatest investors make – so they are aware, and actively put up mental roadblocks to prevent the occurrence.
Mistake#1 & #2: Market Timing and Active Trading
This sums up the whole chapter.
And the relevant quotes to this are:
Only liars manage to always be out during bad times and in during good times
Wall Street never changes, the pockets changes, the suckers change, the stock changes, but Wall Street never changes because human nature never changes.
Far more money has been lost by investors preparing for corrections, or trying to anticipate corrections, than has been lost in corrections themselves.
In my 55 years in the business, I not only have never meet anybody that knew how to do it, I’ve never met anybody who had meet anybody that knew how to do it. – John Bogle – founder of Vanguard.
The first 2 chapters really impressed me and all Peter said makes so much sense, if you are not aware of it already
Mistake#3: Misunderstanding Performance and Financial Information
There are over 10 “misunderstandings” which Peter highlighted but I’ll quote some of the best ones.
First, is that you should never believe that financial media exists to help you make smart decisions. The purpose of any commercial media is to get more “eyeballs” – aka “to get as many viewers as possible”.
More viewers = higher price for commercial space = larger profit = happier shareholders.
To get viewers, shows often overdramatize and draw out events. Just like any good movie – it will want to create tension and a sense of urgency.
Second, is that you should never buy into the bull that Mr Market cares about today. People often ask -“What makes the stock market move up or down?”
Oftentimes, the below are cited:
Unemployment, housing, economic policy, monetary policy, strength of currency, consumer confidence, retail sales, and interest rates.
All are popular choices, Pick one?
But the true answer is NONE OF THESE. The real answer is – Anticipated Earnings. Peter uses a sandwich shop analogy which is so simple yet effective in justifying his point of view.
Third – ‘all time high’ doesn’t mean a squat. This should not surprise anyone, inflation alone is responsible for most of that. Everything we eat, drink or use is at all time high compared to 1,3 or 5 years ago. No indicators they are going down in prices anytime soon. It is likely things will suddenly be selling all-time low? Unlikely.
Mistake #4: Letting thy self get in the way.
Warren Buffett once said – “The fact that people will be full of greed, fear or folly is predictable. The sequence is not predictable”
Mistake#4 fits nicely with my previous article – Path to Financial Happiness – Simplified and Illustrated.
Behavior accounts the most in the mistakes made by investors, most of the time.
Things like overconfidence effect, confirmation bias, anchoring, loss aversion, mental accounting, recency bias and negativity bias are explained in detail. See if you can relate; I can.
Put it in point blank – “Mr Market has never taken a dollar from anyone. To lose money, you have to fall prey to one of the mistakes mentioned in this book. The top mistake is this – letting themselves get in the way. Ultimately, it is our own behavior that does us in. The key to dodging this pitfall is to be aware of what your instincts are telling you and recognize behavioral landmines we have covered in this chapter. Take a step back, slow down and follow the disciplined plan you have laid out for you and your family. The car is going to get to its destination, unless you personally drive it off the cliff”.
Mistake#5 – Working with the Wrong Adviser
Last but not least, Peter outlined 3 aspects to scrutinize before you engage a person as your adviser. And this goes beyond advising you only – consider the fact that this person will be advising your family when you are no longer around. They are:
Custody, Conflict and Competence
Read more of the book’s chapter to get his points in detail but to summarize, it is ideal to have a financial adviser who has no incentive to do anything differently when you and your family are facing the toughest life issues. And to top it up, some of the portfolios example presented by Peter taking into the goals of a layman investors:
Conclusion
A definite recommended read. With investing, as Peter advocates, the less clutter, the better. And don’t only read this – action speaks volumes to see results. Avoid getting sucked back into methods touted by unethical/incompetent advisers and financial media which sound good but don’t work.
2 free copies of the book are generously sponsored by Wiley Singapore for the best 2 comments posted below. They will be sent directly to the 2 luck winners.
Update 29 Dec – winners are Jordan and Wayne
This Post Has 7 Comments
Most of the mistakes I believe we did it before. Though we might be reflect on the mistakes sometime later but I am sure human tends to be forgetful. It is human nature. This book definitely will serve as constant reminder to me because author uses more charts than words which plays its role as book title depicted, whenever our mind were challenged by our defeat, this book can immediately be read to give inspiration to readers including me.
When the market is Bullish, every Tom, Dick and Harry is a Guru …
but when the market is Bearish then the Real Guru will appear.
If you look at this in a deeper sense – the False Gurus – Tom, Dick and Harry is your greed, ego and selfishness. Whereas the Real Guru is your Common Sense.
Think about it.
Thanks CF for your reading recommendation. Investors make decision mistakes and dare to repeat it for the sake of profit without learning from their past experience but through their guts feeling and emotion which is opposed to the EMH. Mallouk has pointed out the often mistakes and behaviors made by investors which is worthwile to be read by rookies and pro investors in reminding them to guard their repetitive behaviors toward profitable gains in the capital market.
Thanks LCF for always unselfishly sharing good and practical information with us all. I dare not call myself an investor yet or even take the risk of investing apart from placing money into FD for fear of making mistakes that will swallow me. However, I have come to realized that FD is just able to barely keep me alive in this economy where inflation is easily higher than the FD interest rate. I guess this book will be able to widen my knowledge and allow me to take precaution where possible to avoid falling into the traps which investors will usually make. Thanks for the recommendation!
Thanks LCF for sharing. It’s indeed rare that you help to found a gem to share with us how to avoid the common mistakes. It’s a difference between financially free or financially broke. Talk about small steps big changes
You must learnt how to fall down only know how to walk. This analogy same as in investment world, we need to make mistake or loss money, then only we will learn how to avoid it. This book is precious for every investor to read and digest before make any bigger mistake or swallow by the shark.
Thanks LCF! This should be a good read as part of continuous learning for investors. Investors definitely should aim not to repeat the same mistakes made but this is of course easier said than done. Human behavior is always irrational and it is up to us as individual investors to keep growing our financial knowledge and prepare for all possible market scenarios.