How to Avoid the Worst Investing Mistake I’ve Ever Seen

The list of investing mistakes I’ve seen (and as a stock broker in the go-go 1990s and early 2000s, I had an opportunity to see plenty of them) is longer than I care to recall. Over-committing, over-trading, sector concentration, you name it — I saw it all as so many first-time investors made their way into the markets a decade ago.

The root cause of those mistakes, however, is a problem that’s still alive and well today — one that’s still all too easy to make, even for market veterans.

Want to know what it is?

I’m willing to bet you’ll figure it out with just a handful of hints.

  • December 30, 2004: “With any significant tail winds, which we will get, the market is bound to go up at least 10% this year (2005).” (Brenda Buttner, Fox News Business Reporter.) Her’s was the more conservative 2005 outlook on “Your World” with Neil Cavuto that day, with most guests predicting the Dow would rally to 13,000 or 14,000 (up about 30%) that year.
  • March 10, 2009: “Given the severity of macro, household, financial firms and corporate imbalances in the U.S. and around the world this Q2 or Q3 sucker’s market rally will fizzle out later in the year like the previous 5 ones in the last 12 months…Earnings per share of S&P 500 firms will be in the $50 to $60 range, but they could fall to $40. The price earnings (P/E) ratio may fall in the 10 to 12 range in a U-shaped recession. If earnings are closer to 50 or the P/E ratio falls to 10 then the S&P could fall to 600 or even to 500. Equivalently the Dow would be at least as low as 7,000 and possibly as low as 6,000 or 5,000.” (Nouriel Roubini, Perma-Bear)
  •  November 2004: “We are seeing another very strong bull market unfolding from the bottom…2005 is going to be very strong… better than the 1990s! Prediction: Dow 40,000, Nasdaq 20,000 by 2009. (Harry Dent, Author of The Next Great Bubble Boom: How to Profit from the Greatest Boom in History: 2005-2009.)

#-ad_banner-#The list could go on for pages, with radical outlooks — both bullish and bearish — from names like Schiff, Shiller and Stein, but these three will make my point adequately: ALL THREE WERE WRONG.

In 2005, stocks did not gain 10% or more; the S&P 500 gained a mere 3% that year. The Dow Jones Industrial Average hit a bottom — “the” bottom — at 6,469 the very week Roubini shared his dire outlook before it soared to nearly 13,000 by early 2011. And needless to say, the Dow was nowhere near 40,000 at any point in 2009, despite Dent’s book promotion appearances from 2005 suggesting it would be.

Now, being wrong is a forgivable sin. Forecasting is difficult. Nobody is always right. To stand up on the rooftop and pound your chest that you’re absolutely certain, however, can cross a line.

See, what these media hounds don’t seem to appreciate is that regular investors listen to their words, and act on them.

I’ll let you in on a little secret: financial TV doesn’t care how wild or impossible the predictions are, or how crazy or off-base the so-called gurus are. In fact, most financial news TV loves these extreme opinions simply because (you guessed it) it’s great for ratings. There’s not a shred of accountability in them though, and rarely will the television media revisit past forecasts and put these professionals to the test. Third parties have followed up on these outlooks, however, and found that about half the wild and well-publicized market predictions over the past decade or so simply don’t come to fruition.

That’s right — the market and economic opinions you’re getting from television are about as reliable as basing a decision on a coin toss.

What’s interesting is this is mostly a TV-based phenomenon. Some of these wild outlooks make their way onto the web, but usually these are recaps of bold predictions found on television. For some reason, when these pundits are asked to put it in writing, the severity is dialed down, and/or caveats are added.

The printed media tends to skip these crazy forecasts altogether. Go figure.

Action to take –> To address the worst investing mistake I’ve ever seen that got this ball rolling, my solution is simple: turn off the TV, at least metaphorically. Find a few non-TV sources you trust, and stick to them until you have a reason to doubt their motives.

No, I’m not saying all the commentary and insight you’ll find on television is useless. It’s still a great way to get a lot of information in a short period of time. It’s also built on a “take action now” bias, however, even though the best investing decision you can make is often to simply do nothing but be patient. You are your own best analyst. Watch too much TV though, and your brain lets you forget it.

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