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Each morning, for the next 365 days, you'll receive a short personal finance-related quote, video or idea in your inbox.
Here are some Daily Idea examples:
Yesterday I related the story of Mark Twain's ill-fated investments. In Twain's case, the problem was fraud. That, of course, is one way to lose money. But it's not the only way. Consider the hedge fund Long-Term Capital Management (LTCM).
LTCM was founded in 1994. That first year, the fund returned 21%. In 1995, it delivered 43%. And in 1996, 41%. The next year, two of LTCM's founders, Robert Merton and Myron Scholes, won the Nobel Prize. It was an astounding run of success.
But then, in 1998, it all unraveled. It turned out there was a flaw in LTCM's strategy. Making things worse, the fund had taken on so much debt that the Federal Reserve Bank had to coordinate a bailout to avoid LTCM's collapse from bringing down its Wall Street trading partners.
The lesson: As an investor, you can never be too careful. This may seem like an obvious statement. But this story illustrates why it bears repeating. In addition to fraudsters and incompetents, there is yet another category: those who appear brilliant but who are also incompetent.
An expression that I hear frequently is: "Things are never as bad or as good as they seem." I see a lot of wisdom in this idea, and it certainly applies to the world of investments. All too often in the media, things are portrayed in extreme terms, as either perfect or terrible. This applies to individual stocks, to industries and to the overall economy.
Consider, for example, Netflix. In 2011, they made a decision to split their legacy DVD-by-mail business from their newer streaming business. In hindsight, the move makes sense. But they bungled the rollout. The result was that the company had to backtrack on the change. The CEO issued a public apology, which was promptly mocked by Saturday Night Live, and the company's stock sank by more than 70% over a six-month period. But soon the crisis was behind them, and between 2012 and 2020, Netflix stock rose more than 5,000%.
This was a notable case, but there are lots of similar examples. The lesson: Don't be too convinced when something looks completely hopeless-or when it looks absolutely flawless.
In baseball, a "called strike" occurs when a batter fails to swing at a valid pitch. And after three strikes, the batter is out. So a batter can be penalized for inaction.
When it comes to investing, as Warren Buffett often points out, there are no called strikes. As I noted last time, there are lots of ways to build a successful investment strategy. Other people don't need to be wrong in order for you to be right. And similarly, just because something is working for someone else, doesn't mean that you need to be pursuing that same strategy. As long as you are pursuing a reasonable strategy of your own, there's no need to do anything different. With investing, there are no called strikes.
Questions? Please call any time:
Adam Grossman
Mayport Wealth Management
(617) 545-5700
[email protected]
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