The Two Biggest Mistakes of the Individual Investor

Part of our business is advising individual investors.  When we talk with them, we try to get them to focus on two big mistakes.

• Chasing performance.  This applies to those who are active investors and traders.  We have written about this on several occasions, and encourage readers to review these posts.  There is a new piece of evidence from Mark Hulbert.  We admire Hulbert as an entrepreneur.  He saw a market -- the analysis of investment newsletters -- and built a business based upon analyzing the recommendations of investment gurus.

Most investors start with the question "How have you done this year (or last year, since we are just starting 2007).  If they are looking at investment newsletters, they look for the hot hand.  Mark Hulbert's recent article on this subject shows the fallacy of this approach.

• Asset allocation.  Many investors gave up on U.S. equities after 2001 and plunged into real estate.  It is time to re-examine the balance of portfolios.  Our series on stock valuation (especially here and here) highlights this choice.

We believe that the best opportunities in stocks are in those that have lagged in performance due to the Misguided Gloom about earnings, the economy, and the Fed.  Some of the key stocks have built better businesses, better balance sheets, and better earnings for several years -- yet the stock price has not reflected the true prospects.

Seizing opportunity means looking forward.  The best opportunities come when sentiment is excessive, as it is now.