The New England Patriots' loss to the New York Giants is being hailed as one of the greatest upsets in Super Bowl history. Why? Is it because the Patriots were undefeated? Sure, the Patriots were favored, but does that mean the Patriots were a sure thing? The "big upset" that occurred during Super Bowl XLII offers some very intriguing and meaningful lessons that deeply relate to investing.
The past is the past
I won't deny that what the Patriots did to their opponents all season long made them the dominant team and a logical favorite to win it all. I wasn't going to bet against them (depending on the odds, of course). Unfortunately, what happens in the past is old news. When you invest in a company, you are not paying for the earnings and growth that occurred in the past, but for the future. Similarly, because the Patriots produced such dominating statistics and had not yet lost a game, people began thinking they couldn't lose. Apparently, books had already been published claiming the 19-0 record as fact. Yet in one game, all those past accomplishments just didn't mean as much as they did before the game.
The same goes for investing. While past results produce data that aids investors in extrapolating possible future outcomes, past performance does not guarantee future results. Whether they realize it or not, many investors buy securities based on past events. We knew the Patriots were really good, and it made sense based on that information that they had a very strong shot at winning it all. But future events are uncertain, and there is no way to "guarantee" a win in any game, be it in football or investing.
Blinded by the hype
As it so often happens, investors sometimes let the cheery consensus overtake sound investing discipline. Google (Nasdaq: GOOG ) and Amazon (Nasdaq: AMZN ) are great companies. At the right price, both of them would make excellent investments. But when investors rush to buy shares based on a history of phenomenal quarters, with the automatic assumption that what occurred then shall occur again, it is a recipe for poor results. Investors buying Google at $600 or $700 were betting that 50%-plus earnings growth could go on and on. That is pure wishful thinking. (The Patriots, to continue our analogy, are still great, but not perfect.) Google will probably continue to grow earnings at rates of return that would be the envy of many companies, but you can't assume there won't be hiccups. Even now at $500 a share -- some 33% off its high -- with a more digestible price-to-earnings ratio of 35, Google still doesn't strike me as a screaming bargain.
As Warren Buffett once remarked, "you pay an expensive price for a cheery consensus." I'm sure investors and Patriots fans alike are feeling Buffett's wise words.
No time limit in investing
Actually, there is a time limit based on your needs and health. But most investors have plenty of time to make meaningful sums from the game of investing. The key is to avoid being taken in by the daily hype in the markets. Don't assume that a rising stock always rises: For most of us, the day we buy is when it starts going down. The party will always end; we just don't know when. For a while, it seemed that Apple (Nasdaq: AAPL ) could do nothing but go up. But investors have pushed Apple down from more than $200 a share to about $130 today. This has nothing to do with the quality of the company, only the price you pay.
Conversely, don't fall for the trap that says, "The price is so low, it can't go any lower!" If you bought Countrywide (NYSE: CFC ) at $10, or more than 75% off its 52-week high of $45 a share, you're sitting on a loss. And Bank of America's (NYSE: BAC ) offer for Countrywide at just more than $7 a share still guarantees you a loss.
Follow your own instinct
An investor's most valuable attribute is temperament. More important than a high IQ level is the ability to keep your emotions in check, think independently, and prevent yourself from falling for the "cheery consensus." After all, we are all here to play the investing game to win.