Everyone has “blind spots” – self-deceptions that we recognize in others but not in ourselves.
One of my blind spots involves the University of California – “Cal” – and its football and basketball teams. My ties to Cal athletics date back to childhood. My stepbrother played tennis at Cal, I grew up with the children of the football coach and the athletic director, and I earned my MBA from Cal. I make my way from Boston to Berkeley as often as I can to see games in person, and watch most of the rest on television. I faithfully pick Cal in football pools and March Madness brackets, despite abundant evidence that I will be disappointed in the outcome!
My blind spot about Cal sports was highlighted after a 2006 loss to the University of Southern California, a school that for Cal fans is part of a collegiate “axis of evil” that includes Stanford University and the University of Texas. While drowning my sorrows in Santa Monica with a close friend who is equally fanatical about Cal sports, we were scolded by a companion far less attached to Cal sports: “You guys don’t get it, if the Pacific 12 conference became the Pacific 2 conference, Cal still wouldn’t win the conference!” I think of this statement every year that I watch a team other than Cal play in the Rose Bowl on New Year’s Day.
The 5 Common Investment Mistakes
Investors have blind spots and investment mistakes often become glaringly apparent when completing tax returns in April. Six common investment mistakes are made by both professional and amateur investors:
Mistake 1: Bad Romance–Holding on to an investment for sentimental reasons.
I used to manage money with a charismatic portfolio manager who bore a striking resemblance to the actor from “The most interesting man in the world” commercials! My colleague was an accomplished investor, but he had a subconscious affinity for CEOs with similar “larger than life” personality traits. On occasion, my colleague’s fondness for larger than life characters was detrimental to our investment performance. Here’s an example.
Vivendi was a French conglomerate led by Jean-Marie Messier, a charismatic visionary who had eye-catching plans that often didn’t come to fruition. We owned Vivendi stock longer than we should have, because of the personal connection between Messier and my colleague.
I’ve seen that pattern repeat time and again – frequently among individuals with sentimental ties to companies that they or family members worked for. Sentiment toward a favorite sports team can be funny a thing to poke fun at, but excessive sentiment toward a stock can be financially damaging.
The Mistake 2: Waiting for a Comeback–Hoping to break even before selling an investment.
Investors often hate taking losses on investments, often delaying the sale of a losing investment in hopes that they’ll recoup the unrealized loss. Many times after the technology bubble burst in 2000, investors told me that they would sell their Cisco, Red Hat or Juniper Networks stocks as soon as they recovered their loss.
In many cases, these investors never recovered their loss, and missed out on superior investment alternatives.
It’s reasonable to continue to own a losing position when updated analysis reinforces your rationale for owning the investment; it’s less defensible to continue to own a losing position with no rationale other than “hope” that it will rebound.
Mistake 3: Putting all your eggs in one basket–Concentrating too much of your net worth in a single stock.
Many investors have too much of their new worth tied up in a single stock. I often see this problem with corporate executives who get large stock and option grants, and with individuals who inherit a concentrated stock position from a loved one. Although there are many positive aspects of owning stock in the company you work for, the risks associated with concentrated stock positions often outweigh the benefits.
Employees of companies such as Enron, Arthur Anderson and Tyco lost their jobs and retirement savings when each company had financial and legal difficulties. The financial crisis was hard on employees of banks, and the current energy crisis is hurting the finances of energy company employees.