How Investors Undermine Their Portfolios
Embracing the noise emanating from Wall Street and other investing misdemeanors
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Most private and professional investors consistently underperform the market. Consequently, they pursue new investment strategies and stock-picking ideas, as their investing behaviors fail to generate alpha.
In this installment of the series, Quality Value Investing (QVI) examines investor behaviors that repel alpha rather than generate it.
We’ll explore further investment behaviors that may undermine a portfolio, concluding with proposed solutions.
They Buy Greed and Sell Fear
Many investors react by selling already depressed securities after a market correction, and more than a few victimized portfolios have yet to recover. Why are so many compelled to buy out of greed and sell out of fear instead of the more profitable inverse?
The daily news cycle and quarterly earnings reports drive speculators to buy, sell, and short stocks recklessly. Unfortunately, the so-called cigar butts—the common shares of fair companies available at cheap prices—and other special situations emphasize trading stocks and practicing arbitrage more than investing in companies.
Analysts and executives provide projections and guidance. From there, the crowd attempts to estimate—or accept at face value—future earnings, stock price targets, margins, and cash flow. Yet, how reliable are the forecasted data points? Based on personal experience and observations, such prognostications are essentially worthless.
Investors on the long side buy securities, believing that prices will rise by the end of the day, week, year, or decade. So, why do many fail in the valuation aspect?
Let’s explore the phenomenon…
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