Trading on Emotion and Other Investor Behavioral Missteps
QVI's ongoing exposé on stock market investment practices that challenge alpha instead of generating it concludes with suggested solutions
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Most investors, whether private or professional, underperform the market over time. As a result, they pursue new investment strategies and stock-picking ideas because their investing behaviors are not producing alpha.
In this series installment, Quality Value Investing (QVI) explores investor behaviors that repel alpha rather than create it.
I apologize for my cynical perspective. Analyzing the negative aspects of a discipline like stock market investing can be just as impactful as acknowledging its positive attributes, such as the ability to select the winning stocks of enduring companies.
QVI distances itself from any short-term trading schemes aimed at quick financial gains, however hopeful they may be, through controversial investment vehicles. Consequently, the newsletter discourages such schemes. Instead, QVI leaves those speculative ventures to professional traders, market gamblers, and the Ouija board.
Throughout the post, whimsical references to the market symbolize the fickle nature of private investors and the aggressive behavior of professional investors, who find themselves adrift in the crowd, driven by emotions or greed when buying and selling investment securities.
Let’s explore other investment behaviors that can jeopardize a portfolio, concluding with recommended solutions.
They Passively Index — Not Actively Hedge
What is the best alternative to do-it-yourself, active investing?
The financial media suggests investing in passive indexes to guarantee that portfolios keep pace with the market. So, what is the worst choice?
Joining the crowd and trading the shortsighted gimmicks churned by the Wall Street fee machine is inferior to buy-and-hold common stock investing hedged with selective indexing.
It is typical for the proponents of passive investing to omit a reminder that indexes contain every company in the market, sector, or industry, translating to owning a lot of poor-quality enterprises in addition to the few good ones. Passive indexing assures average returns to the market, for better or worse.
Whether used for active or passive investing, exchange-traded funds, or ETFs, are derivatives notorious for inherent risk from massive investor participation. Warren Buffett has said that ETFs are candidates for "financial weapons of mass destruction" in a down market.1
While profiting from the meteoric rise in equities from deflated interest rates during the 2009 to 2021 bull market, investors ignored the ongoing threat of inflation to the stock market. Then the bear left its cave, growling in 2022 and again in 2025.
They Speculate in Micro-Caps
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