>How a careful investor got careless
The roar of 1999's bull market in tech stocks overwhelmed the voice of reason trying to tell me that I'm a fuddy-duddy at heart. Nothing like a little success to lead you astray.
By Mary Rowland
Last fall, Jon Markman used Yom Kippur, the Jewish Day of Atonement, as occasion to write a column about his investing mistakes of the year. I was impressed with his humility and vowed to do something similar. Unfortunately, I didn’t get around to it until Pentecost, and the past six months added so many mistakes to my list that I don’t know if I can fit them in a single column. But I’ll give it a try.
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Now I know my friend "WetBhindEar," one of the regulars in our Start Investing Community, will be holding his breath waiting to hear about Sycamore Networks (SCMR, news, msgs), which I bought at 85 and again at 76, 20 and 11. Of all my mistakes, that’s Wet’s favorite, and he reminds me of it every chance he gets.
Sorry, Wet, but Sycamore wasn't my biggest mistake. It was a whopper, all right, but rather than just rattling off the stocks I paid too much for and beating my breast, I’d like to root out the error of my ways. After all, if the only thing you learn from this column is that you shouldn’t pay $85 a share for Sycamore, you'd have a right to be disappointed.
I think my biggest mistake was overconfidence. The academics who study behavioral finance report that when people make money decisions, they often think they know more than they do. We are an optimistic lot, and most of us believe that luck is on our side. Studies show that even in a coin toss, a person who has blown on the coin or uttered some mumbo jumbo over it believes he has improved his chance of winning, even though the odds are clearly only 50-50.
A little success is dangerous
My overconfidence came not from mumbo jumbo but from being a lucky online investor during the great bull run of 1999 in the tech market. And that led me to make plenty of mistakes over the past year.
It wasn’t always so. I started out in investing as a wuss. When MSN MoneyCentral asked me to write a regular investing column three years ago, I wondered what I could offer to compete with Jim Jubak’s "50 Best Stocks in the World" and Jon Markman’s SuperModels.
It bothered me that I was the only woman writing an investing column and a conservative investor. Just a coincidence. I suggested we call my column the Fuddy Duddy Investor thinking it might appeal to the cautious. Trust me. No editor is going to buy a handle like that. We settled on the Careful Investor.
But once I started writing the column, it was as if I’d had a sex-change operation. Before long, my colleagues were demanding I forfeit my “careful” title because of my growing infatuation with tech stocks. In retrospect, perhaps they were right. I can see a rising pattern of overconfidence.
Despite the big market correction in March and April of 2000, I started to believe that it really was different this time, that the Internet was changing the future. Traditional value funds had been down so long that I decided the old value formulas didn’t work anymore and that new approaches to value like Bill Miller’s Legg Mason Value Trust (LMVTX) fund would carry the day.
Of course, even as I was saying this, value was tasting its revenge. When the Nasdaq peaked in March 2000, Warren Buffett’s Berkshire Hathaway (BRK.A, news, msgs) hit its low point. For the remainder of 2000, value soared and the Naz dived. Fortunately, I didn’t sell my value funds. Basic valuations are important.
Sucked in by the frenzy
I was guilty of more than just philosophical errors, though. I let myself get sucked into the tech frenzy. For instance, I bought OpenFund (OPENX) in April 2000 after I wrote a column about it. I reasoned that OpenFund was well-managed and owned small biotech stocks that I wouldn’t want to buy on my own. That may be true. But OpenFund, which posts trades online, is in a category that I called gimmick funds back in my fuddy-duddy days. If I wanted biotech, I should have done some research rather than buying on impulse.
Along the same lines, I challenged Jim Jubak to a stock-picking contest (“Take the Qualcomm Challenge”). Jim had never agreed with my outlook for Qualcomm (QCOM, news, msgs), a company that develops and licenses wireless communications technology. Qualcomm was one of the major powers in my portfolio throughout 1999. I’d sold off chunks of it as the price soared. But a year ago, when Qualcomm was in the tank, it looked like a buy again. I was preparing to write a column about it when I saw that Jim had just posted his own column warning investors away. One part of me said: Whoops. Are you sure you want to recommend something Jim Jubak is dissing? Another part of me said "yes."
I doubt that Jim will be any the worse for wear as a result of my challenge. Neither of our picks is anything to brag about, and I regret adding to the hype and frenzy around technology. I don’t think that did investors any good.
Decisions based on...what?
Finally, and perhaps worst of all, I lost my moorings when it came to investment decisions. For instance, I always tell newbies to avoid making decisions based on conversations in our Start Investing community. But one day in October, Betsy Cone posted this message: “I know a lot of you out there are sitting on cash. What would it take to get you to invest it? What signal are you waiting for?” Betsy pointed out that lots of stocks were bouncing around their 52-week lows.
I had close to half my portfolio in cash. So I decided to take a look. Betsy was right.
And that was the day, Wet, that I bought Sycamore the first time, at 85. Wet argues that I bought it as a momentum play. No way. It was a company I wanted to own. But I didn’t wait until the price was right. I bought it because I had lots of cash and the price was much lower than it had been. That’s not a good reason. The same day I bought Applied Materials (AMAT, news, msgs) at 51 and RF Micro Devices (RFMD, news, msgs) at 26. The point is not whether the price was decent, but that I deserted my own investment strategy.
This is not to point the finger at Betsy, who was just trying to get a conversation going, but at myself. I should know better than to get overconfident and make these kinds of mistakes. As for the details of my strategy, I’m working on a column about that. Maybe I’ll try to float the Fuddy-Duddy Investor idea again. |
