I am an ADHD investor. There. I admitted it. I don’t feel better though.
What IS an ADHD investor? It’s one that loses focus. It’s one that gets interested in one investment, learning a little about it, then loses interest and starts looking at another. It’s one that constantly tries to outrun the market up…and down. It’s one that buys a stock one day, sells it a week later, then shorts it two weeks after that. It’s an investor that chases returns, that ignores great advice, that kicks himself over and over when he realizes that he should have stayed the course. It’s one that makes a great deal of money, a TON of money, then loses it because he ignored the sell signals.
An ADHD investor thinks past performance IS indicative of future results, especially the recent past performance. He always checks out the “hot tips.” He may even buy one or two of them, then kick himself a few days later when they drop 20%.
Actually, I’m not this bad. I’ve chased a few returns and I’ve made some really good money looking at past performance, but only to get a feel for how a company is managed.
But, too many people, including most mutual fund managers ARE classic ADHD investors. They chase returns. They focus only on beating the S&P and Fortune magazine reports that since 1985, only about 4 percent of them did. Those that did beat the market did so by only a small amount. The problem is that just because the market returns 12 percent compounded over the decades doesn’t mean that investors generate 12 percent returns. Most investors generate far less.
Professionals in other fields, like dentists, bring a lot to the layman, but people get nothing for their money from professional money managers. —Warren Buffet
WHAT? The world’s premier investor says that people don’t get anything from their professional money managers? Wow.
What about one of the few money managers that DID beat the market? Peter Lynch wrote in his book One Up On Wall Street : How To Use What You Already Know To Make Money In The Market that the novice investor now “has numerous built-in advantages, which, if exploited, should result in outperforming the market and the experts.”
The good news is that you can reverse the ADHD investor syndrome. Here’s how I did it:
1. I stopped checking my portfolio every few minutes. I even stopped checking it every day. Right now I check it every couple of days. Why? I want to take as much of the emotion out of investing as possible. Checking it every day causes me to react emotionally to drops and spikes.
2. I do as much research on the fundamentals as possible. Personally, I prefer only to invest in companies with a 10 year track record of increasing sales, earnings, returns on investment, free cash flow, and equity.
3. I research the management team. In horse racing it’s called “betting on the jockey.” I prefer to invest in companies that are run by their founders. Personally, I think the founders have a certain amount of pride in their companies and they see them as “their babies.”
4. I trust my research and I stop looking to get in on the “hot stocks.” As a result, I’ve become much more of a contrarian, buying when others are fearful, selling when others are greedy. But I only buy if I see the stock is severely undervalued by a minimum of 50 percent.
5. I always try to keep a little in cash so that when an opportunity presents itself, I can take advantage of it. Confucius said, “The gods cannot help those who do not seize opportunities.”
The most important characteristic you can develop in almost all areas of your life is FOCUS. The ability to concentrate, to focus, and channel your energies will help you overcome the ADHD investor syndrome.
[tags]investor, money, ADHD[/tags]