8/14/2012 3:38 PM ET|
6 reasons to invest like a child
Everything investors really need to know they learned in kindergarten -- and these childlike traits can get you through the roughest market.
So you think that investing in the current market environment is tricky? Only a highly skilled professional analyst is able to navigate the shifting currents created by the Eurozone crisis and the looming "fiscal cliff" in the United States, not to mention the prospect of emerging markets ceasing to provide as much of an upside to global growth. On the contrary, all that's required to stand a chance of doing reasonably well is to adopt some of the behavioral traits of a typical 4-year-old.
Nonsense? Not at all. Of course, 4-year-olds are prone to throwing temper tantrums when they don't get what they want, which we would advise against. But there are some characteristics of 4-year-olds that, appropriately deployed, might put you in a better frame of mind to cope with turbulent and uncertain financial markets. Consider the following:
1. Don't be afraid to fall down and get bruises
Four-year-olds do this all the time -- and they get back up on their feet, dust themselves off and get back to what they were doing. But they don't brood over past errors, microanalyzing every last movement before the tumble. In financial markets, it's much the same. You need to accept the idea that you'll make mistakes and hurt your portfolio, but also recognize that you need to move on quickly. Learn from that mistake, but don't let it haunt you.
2. Be picky
Have you ever watched a 4-year-old eat dinner? Vegetables that are the wrong color, the wrong type or in the wrong position on the dinner plate are greeted with scorn. Parents tend to be driven to distraction by such picky eaters. (I recall many car tours when my younger brother refused to eat anything but peanut butter sandwiches for lunch and dinner.)
Such fastidious pickiness can serve an investor well. A company CEO who chooses to duck tough questions during an earnings conference call or annual meeting? An industry like the energy sector, whose members are continuing to spend money hand over fist on new projects even as the prices they can get for their oil and natural gas decline? Those may just be a few of the things that you choose to turn up your nose at. Decide for yourself what kinds of corporate traits don't pass muster with you -- and stick to it.
3. Don't listen
A bit of a no-brainer for 4-year-olds; not listening is their default mode. Investors can learn from this approach, too, since they are constantly bombarded by advice, guidance and myriad forms of punditry. (Sure, that includes this column.)
Sometimes you need to stop listening to the noise. Rarely are the opinions of others in sync, and when they are, it's too late to pursue an investment idea. (For instance, everyone agrees that the U.S. corn crop is in trouble this summer, thanks to the drought -- but the price of corn futures has already soared to $8 a bushel.) Learn when to turn off the noise, or when not to pay attention. And understand when it's important that you do listen, like when your parents told you not to touch that stove top because it was hot.
4. Take a nap -- or a time out
Preschool is exhausting, and so are the financial markets. An investor who doesn't opt for a nap voluntarily is likely to be confronted with some kind of adult variation of a time out, as he licks his wounds after letting emotion get the better of him during a volatile period. To stay calm, step back from the fray and try to view it dispassionately. Think of the "nap" or "time out" as a chance to gain perspective, to think about the longer-term issues that are likely to affect both your personal finances and your portfolio.
Instead of worrying about what the Chinese GDP will be in the third quarter of 2012, ponder the outlook for China and the countries surrounding it for the next decade or two. When you've finished your time away from the markets, come back refreshed and better prepared to make big strategic decisions.
5. Keep tabs on your favorite toy
If you're 4, and your Iron Man mask is your favorite possession, you don't let it out of your sight, do you? Equally, if you've got a favorite stock in your portfolio, don't take your eyes off it. Odds are, because it is your favorite it plays a disproportionately large role in your portfolio.
Think of all those avid iPhone and iPad owners who cherish their stake in Apple (AAPL). That's all well and good, but in this case, keeping it in sight means tracking what's happening at Apple or any other investment that plays a disproportionate role in your financial well-being. (It may be your employer's stock, which you've acquired thanks to stock option grants or an employee stock option purchase program, for instance.)
Regardless, if you cherish it, you need to be aware that sentiment could distort your judgment. A 4-year-old isn't going to be willing to relinquish her stuffed monkey, even to be washed and stitched together again. That's where an adult needs to show that there always comes a time when you need to put your favorite toy to one side and branch out a bit, as you grow up.
6. Be open to new things
The one advantage any 4-year-old possesses over pretty much any adult -- including almost all investors -- is a sense of wonder and excitement, a boundless curiosity about the world and a viewpoint that is anything but jaded. To the extent that you can combine that outlook with the kind of common sense an adult acquires over time, it will help keep you alert to new investment ideas. The folks who saw the possibilities of the Internet back in the early 1990s and went on to make a fortune by buying stakes in eBay (EBAY) and Amazon.com (AMZN) were those who understood that what looked like a dream or a fantasy could be transformed into a very profitable reality.
We all grow older -- it's one of those laws of nature. We suddenly discover that we need reading glasses and hair dye, or that our bones start to ache in cold weather. But maintaining some childhood traits may actually give us an edge in the very adult and all-too-serious world of investing. And if these behaviors do lead to profits in your portfolio, remember another kindergarten lesson: Have fun.
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21 comments and only 4 about the article. All the rest are SPAM, which I have reported. I guess the article was worse than I thought.
Who is monitoring these blogs anyway?
if your folks are rich you are probably rich, if your folks are not as rich you are probably not as rich.
"Come here little kid, drink the Kool Aid. You can trust me, I'm your friend (huh huh)."
I guess they figure that getting suckers to invest in con games, I mean Wall Street, really is like taking candy from a baby.
1) The banks and Wall Street need your hard earned money.
2) High frequency traders need someone to believe their antics so as to ensure the stock goes down and they need to make extra cash on shorting stocks they don't like.
3) The Koch brothers cookie jar is almost empty and they need more chocolate chip cookies to keep Mittens from questioning them about their true motives.
4) Under new GOP/TP rules anyone earning less than $300K/yr should expect to lose their shirts to pay for their tax cuts for those who don't need them other than to buy a second yacht.
5) Your financial adviser needs to get above that $300K/yr so unless you believe him and pay his exorbitant fees he won't get there.
6) Your mortgage company needs their hedge fund to profit from your bad decisions to pay for all the houses they have in foreclosure and allowed to decay that badly that they now need to repair them so they can sell them and make even more profit.
Politicians, prostitutes and money managers all have one thing in common. They all want your money. At least with a prostitue you get something in return. Get rich like the rest of them. Beg, barrow and steal.
A child is too small to worry about. They love this type of mentality / advise.
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