Three Bad Investing Habits to Dump in 2015

Keith Fitz-Gerald Dec 17, 2014

The latest research from DALBAR is very graphic…

Over the past 20 years, individual investors averaged a measly 2.53% a year, versus the S&P 500, which chalked up 9.02%. In other words, your average annual return was 6.49% less than what it could have been each year. Ouch.

So what’s going on?

When you look back over the last two decades, two things are readily apparent – a) that the markets have been rocky and b) that there’s plenty of blame to go around. The Fed, the big banks, bubbles, China, Washington, Wall Street, the ECB… it doesn’t matter. At some level, they’re all guilty.

But you know what? Those two factors are actually NOT the primary causes that doom millions of investors to poor performance.

THIS is the real culprit…

Turns out that every investor is hardwired to do three things that kill returns.

And that’s what I want to talk about today – these “bad investing habits” – for one simple reason. If you understand what these costly behaviors are, recognize them in yourself, and learn how to eliminate them, then you can build wealth much more quickly.

And you can absolutely beat the market.

It’s a Total Wealth tactic that ranks right up there will picking the right stocks and controlling risk.

So let’s get cracking…

Bad Investing Habit No. 1: Recency Bias

Recency bias is the scientific term for when short-term focus trumps long-term planning and execution.

It’s what happens when somebody yells “fire” and everybody runs for the same exit at once, despite having entered through any of half a dozen doors in the auditorium.

This is why momentum trading works, for example, or why the news channels seem to cover the same stocks at nearly the same time – because a huge number of people are focused on exactly the same companies simultaneously. Logically, they then become the subject of increased attention and tend to move more strongly or consistently.

The question of “why” is the subject of much debate among human behaviorists, but I chalk it up to the fact that human memories tend to focus on recent events more emotionally than they do longer-term plans that are put together with almost clinical detachment.

Simply put, recent knowledge overrides longer-term thinking and memory.

And the more extreme the events or the news, the sharper our short-term focus becomes.

This is why emotion is the one investing tactic you should never use. It undercuts absolutely everything you do as an investor.

Dr. John Casti, a world-recognized expert on the science of complexity and the author of Mood Matters, says “bombshell events are assimilated almost immediately into the prevailing [social] mood,” whereas longer-term cycles bear almost no witness to gradual change.

If that doesn’t make sense, think about what happened on 9/11. Most of the world’s major markets bottomed within minutes of each other on short-term panic and emotion. Then, when trading resumed days later, they began to climb almost in sync as highly localized events once again faded into the longer-term fabric of our world.

And that brings me to herding.

Bad Investing Habit No. 2: Running with the Herd

Humans would rather be wrong in a group than right individually. So the vast majority of investors tend to make decisions, and mistakes, together en masse.

You can see that in market data suggesting we have a fine tradition of doing exactly the right thing at precisely the wrong time. Instead of buying low and selling high, most investors tend to sell low and buy high, further damning themselves to subpar returns.

A lot of studies suggest this is the case, but none is as interesting as that by Philip Z. Maymin, an assistant professor of finance and risk engineering at Polytechnic Institute of New York University.

Prof. Maymin scrutinized records kept by the investment firm Gerstein Fisher from 1993 to mid-2010. His work included analysis on more than 1.5 million interactions between the firm and its clients. And he made a staggering finding. The value of investment advisors is not so much in picking stocks but in keeping clients from impulsively trading at the wrong time. Maymin found that aggressive orders cost clients about 4% a year.

In other words, investors act against their own best economic interests with alarming regularity and cost themselves huge amounts of wealth in the process.

Back to complexity expert Dr. Casti… He says this is because society tends to form social groups based on affinity rather than simply becoming a collection of isolated individuals. That’s why investors tend to magnify the importance of information you see in the herd around you rather than breaking from it before it goes over the cliff.

When it comes to money, we see this in a phenomenon known as “chasing returns” or following the hot money. This is why annual performance issues like those published in Forbes, Money Magazine, or Kiplinger’s, for example, are so irresistible. And so dangerous.

That brings me to fear.

Bad Investing Habit No. 3: Letting Fear Move You (or Paralyze You)

Right now millions of investors are sitting on the sidelines completely paralyzed by plain old-fashioned fear. And who can blame them? These markets have been some of the most vicious in recorded history.

Yet I would argue that fear actually contributes to both recency and herding. That’s because it causes people to sit on cash that should be invested or keep money in the game when it should be taken to the sidelines.

Clearly, bad habits work together to keep you from the returns you deserve.

Studies show that this comes down to pain. Losses hurt. They hurt financially and they hurt emotionally. Nobody likes them.

That’s why people are more likely to let a losing position go against them than they are to take profits – because they can’t take the “pain” of being wrong. The fact that they are unprofitable becomes almost irrelevant.

I can attest to that, having helped hundreds of thousands of investors over the years navigate today’s complicated markets through my columns, presentations, and seminars worldwide.

That’s why I do everything I can to enforce the discipline of taking profits and minimizing losses in careful concert with an overall plan. It’s why both Tactics and Risk Management are an integral part of the Total Wealth process.

By breaking the recency factor and eliminating the herding mentality that went with it, I find that many times fear is no longer an issue.

So how do you break the habits that you didn’t know you had?

I’m glad you asked… I’ll be back in a few days to show you.

As usual, we’re going to keep it simple.

Best regards for great investing,


13 Responses to Three Bad Investing Habits to Dump in 2015

  1. fred says:

    Love your wisdom!
    Good to be with you

  2. Linda says:

    Keith, Really enjoying all of your advice and insights. I’m amazed at how “right on” you seem to be. I wonder if you could update on KTOS. I never got in earlier and wonder if now you would still recommend getting in? Also, on these long term holdings is a stop loss of 25% appropriate or do you suggest a different strategy? Thanks for all you do for us. Linda

    • Keith says:

      Hello Linda and thanks for the kind words.

      I’m actually working on a special KTOS update right and will publish it shortly. In the meantime, to the crux of your question, I still believe the company has terrific potential. The, as always, is to manage your risks properly because the stock will ebb and flow. My suggestion is to start with two of our favorite tactics that can help – dollar cost averaging and trailing stops or even calendar stops that give you some flexibility depending on your circumstances.

      Best regards and thanks for being part of the Family, Keith 🙂

  3. Michael Niddrie says:

    I think Valentum’s methodology, analysis and critical factors assist steering you away from the emotional issues.
    You also help greatly!

    • Keith says:

      Thanks Mike!

      Are you referring to Valentum Partners out of Stockholm by chance? I’d love to learn more about what has caught your attention in the way they do things.

      Best regards and thanks for being part of the Family, Keith 🙂

  4. ron spain says:

    Thanks for your insight. I was a Registered Rep 35 years ago but changed careers. However still involved daily on the Market. I have held ADEP for a year -I’m down 50% ( my bad no trailing stop). When do you give up and sell vs. holding to break even – my investment is $8000

    • Keith says:

      Hi Ron.

      You are very welcome and your words mean a lot to me.

      As for give up and sell, let me refer you to the Archives tab above and a feature a while back on the “Ultimate Trailing Stop” that may give you the answer you’re seeking.

      For me it comes down to potential…if the reasons for which I have recommended a stock are intact and the underlying argument still there, I am inclined to dismiss short term volatility if the risk mangement picture remains intact. If not, I could make the argument that taking a few lumps here is the better part of the process.

      Best regards and thanks for being part of the Family, Keith 🙂


    My first question to anyone who gets the idea of ‘investing’ their hard earned cash in the markets – before even talking about any specific market – is, ”Are you willing and able to devote your FULL time to Investing?”

    If they say ‘NO’, then I tell them to invest their cash through a ‘middleman’, an RIA (Registered Investment Advisor) and that their returns will depend on the RIA’s qualifications and proven earnings record.

    If they say ‘MAYBE’, then I ask them if they’re willing to devote their mind and their time to learning how ALL markets operate. If they don’t have the time and the determination to learn the fundamental process by which ALL markets move, I tell them to invest through a good RIA.

    If they say ‘YES, I’m willing and able to devote my mind and time to learning how ALL markets operate’, then I tell them the very FIRST thing to learn, understand, and master is SUPPORT & RESISTANCE. Without a solid understanding of S&R, all the trading strategies, indicators, money management systems, and ROI calculations are meaningless nonsense.

    For the TRUTH is, once someone sees and understands Support & Resistance show itself over & over & over again, they will then feel comfortable with what ‘market action’ REALLY is and will naturally be compelled to develop their own ‘style’ to trading the markets.

    WITHOUT a solid understanding of S&R, a person is absolutely completely and totally CLUELESS about ‘market action’ and the reason WHY they win or lose.

    • Keith says:

      Hello Alan.

      Thanks for taking time to share and for the detailed thinking you provided. I think you raise a number of very important points, especially around the concept of Support and Resistance. I’m actually going to cover those in more detail in an upcoming column and hope you’ll chime in again when I do.

      Best regards and thanks for being part of the Family, Keith 🙂

  6. Keith says:

    Hi guys and thanks for sharing.

    As much as I’d love for every stock I recommend to do nothing but go up, that simply doesn’t happen, especially when the broader markets themselves are on the move down as was the case for much of the timeframe you reference. It’s entirely logical that a small cap stock like Ekso comes under pressure given the more volatile nature of small cap companies in general when even the big boys are getting carried out feet first by broader market conditions.

    As for the updates, I have written about Ekso several times including a discussion on the Amendments to the Warrant offering with regard to how that may pressure prices in the short term. I plan on doing another update shortly. In the meantime, though, if you’d like more information, I suggest you check the SEC’s database with regard to Ekso’s Form 8-K and 510(k) filings.

    In closing, I beleive Ekso has tremendous potential and my take on current trading activity is that it’s par for the course given the company’s current stage of development. If anything, now’s a great time to buy. However, never ever risk money you cannot afford to live without.

    Best regards and thanks for being part of the Family, Keith 🙂

  7. Gary says:

    Hi Keith,
    Love the news letter, finally someone pointing the way. I want say that this subject seems to be the hot
    new thing for investing this year. It is unbelievable how many times I have received emails talking about
    this very subject over the past 9 months. Anyway with that said my problem isn’t running with the heard or emotional when it come to investing. I hate to say it but it is IGNORANCE on how to invest. I seem to always fall behind the market. Like showing up to the party after it’s over. Once I make a decision I follow it through. I don’t get hung up on what the market is doing. I focus on what I am trying to do. Of course I try to analyze what’s going on but I certainly don’t get overly upset when the market drops 200 points. I see it as an opportunity. I just don’t
    know how to find those gems that others seem to do and then how to invest in them. I am now learning about stops but from where my knowledge is I have a long way to go. The best part is that my lack of investing knowledge hasn’t hurt that much. I have been directing my IRA this year and I am up 25%. I feel if I really knew
    how I would certainly have done better. Like I said earlier I usually show up after the party. That’s why I like your letter because it explains ideas and what an investor should be doing. I am looking at a 3 to 8 year window and want to do the best I can do in the time left. So I welcome all of your insight on the subject matter.

  8. Mike says:

    Hi Keith,
    I am new to investing and have a steady job in the legal industry.
    I do not have an over-abundence of time but I enjoy learning about the Stock Market and the ins and outs of investing.
    I currently do not have any investments and would like to enter in with something steady, yielding a nice dividend.
    Do you have any recomendations?
    Thanks a lot and I have enjoyed reading your posts!!

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