Some things just shouldn't be said.
Certain phrases investors say, which seem sensible on the surface, are actually symptoms of illogical or uninformed thinking. Here are five of them, in ascending order, according to how much they drive me crazy.
5. "There isn't much visibility on that stock."
Earnings are rarely "visible," i.e., predictable, unless the company is in an unusually steady business, such as cigarettes or facial tissues, or unless the company is manipulating earnings to smooth them out.
4. "I'll sell that stock when I get back to break-even."
This is as foolish as the notion that you should automatically sell half of a stock that has doubled. The stock doesn't know at what price you bought it. Your decision on whether to retain a stock should depend on a company's earnings prospects and the stock's current price relative to underlying measures of value.
3. "This must be a great stock. All the analysts like it."
My studies over the past dozen years indicate that when analysts are unanimous in recommending a stock, that's actually a danger sign. Since stocks advance by exceeding expectations, you're better off in an unpopular stock, or one on which analysts' opinions diverge widely.
2. "So-and-so used to be a great money manager, but he's lost his touch."
I've heard this said about Ken Heebner, Bill Miller and my mentor, David Dreman, among others. Managing money isn't like playing professional basketball; the skills don't usually dissipate with time. Usually, what has happened when you hear this remark is that a good manager has recently ended a hot streak and entered a cold streak. Even the best money managers don't beat the market every year.
1. "I want to wait to invest until this _______ situation is resolved."
At the moment, the words "fiscal cliff" would fill the blank. Last summer it would probably have been "European debt crisis." In 2010 it might have been "Gulf oil spill." At other times it might have been Mideast unrest, the U.S. debt ceiling or the recession of 2007-2009.
A person who waits for a problem-free time to invest will wait forever. There is no such time, and never has been.
People tend to assume that today's problems are different, and worse, than those of yesteryear. Oh, really? What about World War II, the Berlin blockade, the Cold War, nuclear fallout, the Cuban missile crisis, Vietnam, Watergate, inflation and stagflation in the late 1970s, the AIDS crisis and the terrorist attacks of 2001?
Despite all of these problems, the S&P 500 index returned 10.88% annually, compounded, from Dec. 31, 1940, through Dec. 31, 2011. Times when everyone is worried are often the best entry points.