Seven Lessons for Investment Failure


As I was searching through the investment section of my Kindle (strange to hear, but maybe this is why Borders Books is struggling) for a book to download, I noticed there was no shortages of “expert” advise on investing and getting rich. Strangely, they all seemed to have the same trend; The Ten Best Funds for Today, The 5 Lessons A Millionaire Taught Me, The Five Rules for Success, The 9 Steps to Financial Freedom…blah, blah, blah. 

So, I began to think of what legendary investor, Charlie Munger of Berkshire Hathaway, had said in his commencement speech to the graduating class of Harvard in June 13, 1986. Munger explained how he finally decided what to say was based on a speech by comedian and late night TV host Johnny Carson. Specifically, Carson couldn’t tell the previous graduating class how to be happy, but he could tell them from personal experience how to guarantee misery. Munger explained, “…how to create X by turning the question backward, that is, by studying how to create non-X. The great algebraist, Jacobi, had exactly the same approach…many hard problems are best solved only when they are addressed backwards. “Invert, always invert,” said the great mathematician.”* Hence, my Seven Lessons For Investment Failure.

Lessons for Failure:

Lesson One: Pretend you don’t need help — Although many are capable of handling their investment portfolios on an intellectual basis, the one area they continue to battle with is separating their emotions from investment decisions. For example, a study done by an independent research firm, Dalbar, found the following: From 1989 to 2008, the average stock fund investor returned 1.9 percent per year. Yet the average stock fund returned 8.4 percent per year1. So, lesson one for failure is to continue to believe that you can do everything on your own.

Lesson Two: Believe ‘This time is different’— From the beginning of time…things change. The one constant in life is…things change. The next crisis…is always different. However, we somehow manage to keep moving forward. Lesson two for ongoing investment failure is to continue believing that this time is different.

Lesson Three: Believe what you read — The investment media has been somewhat questionable on their accuracy; from Newsweek’s August, 1979 cover of “The Death of Equities,” The Economist March, 1999 Cover of “Drowning in Oil,” Businessweek’s July 29, 2002 cover of “The Angry Bear,” to a popular cable host commenting in March, 2009 to “Get out of Equities and Buy Long Term Treasuries…it could be six years before stocks come back.” So, lesson three of investment failure teaches us to continue to listen to past media advice, it will most likely produce the same result.

Lesson Four: Focus on the ‘important but unknowable’ — The Markets, Interests Rates, The Economy, Oil Prices, World Crises, Real Estate, and Corporate Earning are all important figures that need to be understood in the short run. However, an interesting study was done by The Wall Street Journal’s Survey of Economist from December 1982 through June 20092. It asked the average economist to predict which direction interest rates would go in the next six months and compared it to the actual direction. The result was that 66 percent of the time they were wrong from 1982 to 2009. So, continue to focus on what is important in the short run, as it seems to play out in the long run for our investment failure.

Lesson Five: Stick with the herd — The Tulip Bulbs in the 1600’s in Holland which at its peak sold for around $110,000 in today’s dollars, the “Nifty Fifty Stocks,” the stocks in the late 90’s, and real estate around 2005 were all areas where the herd of average investors placed monies based on popularity. Continuing to use history as your guide to move monies in to the next hot area will potentially bring those herd like returns of the past.

Lesson Six: Wait for a better time to invest — As the equity markets historically have provided some volatile times, pulling investment dollars out at these times have given investors the comfort level to sit on the sidelines — until a better time or signal appears. What is most interesting in this theory — the investor not only has to be correct in timing the market on the downside (when to sell before the bottom falls out) but also when to get back in before the upswing happens. According to Thompson Financial and Lipper, the Dow Jones Industrial Average has generated the following positive returns from 1929-20083:

            One Year Holding Period- 73 percent of the time

            Five Year Holding Period- 92 percent of the time

Continue to wait for a better time to invest and it can allow the potential returns to be given up.

Lesson Seven: Investing for Retirement, not Life expectancy — The average investor has viewed investing and where to place those investment dollars based on their timeframe to retirement, although the average life expectancy of a couple that retires at age 62 could last another 30 years (if they don’t smoke*). As a result, those assets may be placed too heavily in cash and fixed income investments — during the rising cost in retirement over said 30 possible years, rather than equities that have historically helped investors maintain their purchasing power. Continuing to believe your investments don’t need to last past retirement may allow theory to become reality. 

Past performance is no guarantee of future results.

This article was written by Lou Melone, Managing Partner, with Budd, Melone & Company in Auburn Hills, MI.  Lou Melone can be reached at 248.499.8704. 

Posted date on Article XI, Issue II

Dated 4.2011 

Wells Fargo Advisors Financial Network did not assist in the preparation of this article, and its accuracy and completeness are not guaranteed.  The opinions expressed in this article are those of the author and are not necessarily those of Wells Fargo Advisors Financial Network or its affiliates.  The material has been prepared or is distributed solely for information purposes and is not a solicitation or an offer to buy any security or instrument or to participate in any trading strategy.

Budd, Melone & Company and Wells Fargo Advisors Financial Network do not provide tax or legal advice.

Stocks offer long-term growth potential, but may fluctuate more and provide less current income than other investments.  An investment in the stock market should be made with an understanding of the risks associated with common stocks, including market fluctuation

Investing in fixed income securities involves certain risks such as market risk if sold prior to maturity and credit risk especially if investing in high yield bonds, which have lower ratings and are subject to greater volatility.  All fixed income investments may be worth less than original cost upon redemption or maturity.

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Investment products and services are offered through Wells Fargo Advisors Financial Network, LLC (WFAFN), Member SIPC, a registered broker-dealer and separate non-bank affiliate of Wells Fargo & Company. 

 Budd, Melone & Company is a separate entity from WFAFN

*Source: On Success-Charles T. Munger reprint with permission by Davis Distributions, LLC

*Source: Based on Industry Life Insurance Tables.

1- Source: Quantitative Analysis of Investor Behavior by Dalbar, Inc. (March, 2009) and  Lipper.  Dalbar computed the “average stock fund investor’ returns by using industry cash flow reports from the Investment Company Institute.  The “average stock fund  return” figures represent the average return for all funds listed in Lipper’s U.S. Diversified Equity fund classification model.  Dalbar also measured the behavior of a “systematic investor” and “asset allocation investor.”  The annualized return for these investor types was 6.1% and 3.7% respectively over the time frame measured.  All Dalbar returns were computed using the S&P 500® Index.  Returns assume reinvestment of dividends and capital gain distributions.  Past performance is not a guarantee of future results.

2- Source: Legg Mason and The Wall Street Journal Survey of Economist.  This is a semi-annual survey by the Wall Street Journal last updated June 30, 2009. Benchmark changed from 30 year Treasury to 10 year Treasury.

3- Source: Davis Advisors. Performance obtained from a combination of sources, including but not limited to Thompson Financial, Lipper and Index websites.