The desire of many people—maybe even some of your clients—to achieve wealth tends to drive many into making decisions based on their emotions rather than logical ones based on reality. Emotional choices usually provide some immediate short-term gain, while in reality most have unfortunate long-term consequences. A prime example of this is many times champion American Quarter Horse exhibitor, Rita Crundwell. The Dixon, Ill. comptroller is charged with embezzling $53 million of public money since 1990 to fund a lavish lifestyle, which most people who knew her assumed was due to her highly successful horse breeding business. As we are now learning, the reality of Ms. Crundwell’s ‘wealth’ is something quite different. Assuming all the charges against her are true, how does someone make such bad emotion-based decisions, all for the desire of short-term greed/perception, rather than the ethical reality that wealth comes from a long-term, patient process?
The same premise holds true in the investing world, where people invest based on their perceptions rather than reality. It seems many investors are continuously looking for the Holy Grail of wealth—since they perceive that the newest trading strategies, market timing trends or the most recently discovered guaranteed investment somehow will create enormous amounts of wealth overnight. Furthermore, we have mass marketing campaigns from large financial institutions that promote the perception that opening an online brokerage account and analyzing some stock charts with buy or sell points will generate that same wealth, instead of just delivering higher commissions for the online brokerage firm or bank. If investing was that quick and easy, wouldn’t everyone be rich?
Famous individual investor Jesse L. Livermore said it best about the common investor’s desires:
“The average man doesn’t wish to be told that it is a bull or a bear market. What he desires is to be told specifically which particular stock to buy or sell. He wants to get something for nothing. He does not wish to work. He doesn’t even wish to have to think.”
The reality? Investing and creating wealth isn’t easy and it never will be. Why, then, do so many people continue to believe, and act, as if the opposite were true? Many basic investors trying to time the market sold out of the stock market around the lows of March 9, 2009, and are still sitting on the sidelines looking for the next big buy signal to get back into the market. They perceive to have “saved” their money from the recent Armageddon, when the reality is they lost more of their money due to selling versus the some +87% market return since then, assuming the S&P 500 range of 2009’s low of 667 to 1250 at the end of 2011. The truth is that more investors believe in the perceptions of investing rather than the basic realities, indirectly allowing those perceptions to drive them toward emotional decisions rather than educated ones.
The chart below shows all negative calendar year returns for the S&P 500 TR index from 1926 through 2010. When analyzing the data span of some 85 years, only 24 of those were negative, representing roughly 28%. Of those 85 years, only six had negative calendar year returns in excess of 20% or just 7%. Furthermore, only three of the 85 years had negative returns in excess of 30% or roughly 4%. These fluctuations are to be expected; otherwise it would be a utopian environment if the stock market was never in negative territory.