It is that time of year when everyone looks back at the past twelve months, and looks forward to the new year. It is a time for reflection and improvement but, based on my forty or so years in the markets and a decade or so of writing about them, it seems to me that most investors do it wrong in two main ways. Firstly, if they look back at all, they tend to focus on their successes while ignoring their losses. Secondly, they then focus on specific things to buy, even though the future is and always has been unknowable.
Both of those habits are at best pointless and, at worst, actively harmful to your wealth.
Not just in investing, but in life in general, it is always tempting to pat ourselves on the back. However, most of the time, all that we learn from our successes is we were smart, lucky, or some combination of the two. That makes us feel good, but tells us precisely nothing about what we should do in the future. It is far more beneficial, if a bit more painful, to look at our failures and learn from them what not to do. When you do that, though, keep in mind that saying you were unlucky is not enough, even if you were. A loss may have been the result of some freak event or some unforeseeable occurrence, but you should start from the position that even if there were unfortunate circumstances, you probably made a mistake of some kind.
Did you make assumptions that were unwarranted when you first bought that something, or ignore some crucial warning signs? Or, once the situation changed, did you hold on to a position too long because arrogance or pride made you too stubborn to cut when you should have, turning a profit into a loss, or a manageable loss into a disaster? Losses could be made worse by either of those things, or they could be the product of a whole host of other mistakes. Whatever their nature, though, you are doomed to repeat those mistakes unless you admit them. Focusing only on the good investments in the past year doesn’t allow you to do that.
Then, when you start to look forward, don’t think in terms of specifics. There are around six thousand stocks listed on the NYSE and Nasdaq combined, so the chance of you finding the best of them without something to draw your attention to them is minimal. If you look for a stock or stocks to buy, of course you will find some, even if the logic behind buying them is not particularly solid, because of a kind of confirmation bias: You told yourself you would find something, so you did. But the stocks you find may not be your best options, certainly not for the whole year.
That doesn’t mean that you shouldn’t strategize. Rather than looking for single stocks to buy, think about the big picture: What does the available evidence tell you is likely to happen next year? I like to start with the very big picture, looking at the geopolitical situation and the prospects for global growth, then narrowing down to the U.S. specifically, and only then do I consider sectors and industries. At all times, though, I am not looking for opportunities in individual stocks, but for areas -- countries, market sectors, and industries -- where opportunities or things that could derail the markets might appear. I follow the news from those areas closely, then make decisions based on what actually happens during the year, not what I think will happen.
The holiday season is a time for reflection and using it to plan ahead is a good idea, because intentional investing always beats a haphazard approach. Going in with a strategy is important, but how you arrive at that strategy also matters. You learn more from failure than from success, so don’t ignore the bad trades from the past year, and don’t get too caught up in finding things to buy. If you eliminate those two common errors, there is no guarantee that your returns will beat the major indices next year or that it will be a success, but it is at least more likely than if you don’t.
Happy holidays!
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
Read Martin's Bio