You can miss out on hundreds of investing opportunities and still do well – but if you back too many duds, you’re sure to do poorly.
Yet in 2007, a Stanford University study found that what we fear most in investing isn’t the risk of loss, but the risk that we do worse than everyone else. We don’t fear being poor nearly as much as we fear being poor when those around us are rich – and that causes some very risky behaviour.
First, it means we’re particularly attracted to ‘lottery ticket’ stocks – pioneering biotechs, speculative miners, or ‘the next Apple’. We all love a good story, but as everyone gets on the bandwagon, prices rise and the stocks very often become overvalued.
Strangely though, the Stanford researchers found that even if investors recognise the stock is overpriced, their fear of diverging from the crowd and watching the stock continue to go up means they often refuse to sell.
In late September, we recommended our members sell vitamin maker Blackmores on valuation grounds and, a couple of weeks later, that they sell The Reject Shop. Those stocks have since risen 33% and 24%, respectively. Ugh.
It’s not the first time we’ve been caught with our pants down in the short term, and it won’t be the last. But it doesn't worry us.
The truth is, if you insist on a margin of safety, you just won’t catch every winner. Blackmores could double in price from here but that doesn’t mean it was a mistake to sell it a month ago if you weren't being adequately compensated for the risk.
Our Buy recommendations have returned 14.1%pa on average over the past 15 years, outperforming the All Ordinaries Accumulation Index by 3.5%pa.
That record wasn’t built by picking winners alone; avoiding losses was just as important. And, to do that, you have to be ready to pass on the vast majority of stocks and accept that it may mean you miss a few big winners.
Missed opportunities are annoying, but they deserve to be celebrated. They’re a reminder that you have stringent investment criteria, and that will serve you far better over time than jumping on every bandwagon.
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