(April 5) – “Of all the enemies that investors face, the most lethal lies within,” write fund manager Larry Sarbit in today’s Globe and Mail.
“Over the long history of investing, when stock investors’ capital has evaporated, it has not been because of a lack of availability of financial material. Detailed information about companies, through public filings with securities commissions in Canada or in the United States, has always been available. Numbers have been printed in black and white for all to see, and in most cases, investors have had reasonable access to public company personnel, either through investor relations’ contacts or directly with management. This has allowed investors an opportunity to get a flavour of the people in charge and what their intentions are regarding the future of the company.
“Furthermore, if individuals have failed as shareholders, it’s not because they were ignorant of the fundamentals of intelligent, successful investment strategies. Over the years, brilliant volumes have been written, available to all would-be investors. These classics have drawn the successful road maps followed by the authors, dating back to the early part of the past century with Benjamin Graham, the father of securities analysis, right up to the most recent annual report of Berkshire Hathaway, written by one of the most successful modern-day investors, Warren Buffett.
“The overwhelming puzzle therefore is why? Why do seemingly intelligent people make such colossal blunders with such catastrophic results to their net worth?
In my humble opinion, otherwise bright individuals have botched the investment process because of psychological flaws and influences that led them to deviate from the sensible, and behave in truly illogical, stupid and sometimes insane ways.
“History is filled with such examples — tulip mania in Holland in the 17th century, the South Seas bubble in the 18th century, the Florida land development insanity of the 1920s, the “nifty-50” craze of the early 1970s, the gold and Japanese market madness of the 1980s. And lastly, there is the one current mania — perhaps the mother of all extremes: the technology craze we’re in the thick of.
“There aren’t enough hours in the day to document the lunatic behaviour we have witnessed over time, but the key point is that it keeps happening over and over again. Each catastrophe has a different script, but it always ends with the same tragic outcome — terrific destruction of capital, obliteration of companies and many individual tragedies.
“There are some key signposts that can indicate an individual investor is headed in the wrong direction. A lot of these people, who earn a living through investing, have different and even more serious psychological problems and pressures placed upon them.