An Investor's Guide to Famous Last Words

One of my favorite quotes comes from Black Swan author Nassim Taleb: "People focus on role models; it is more effective to find antimodels -- people you don't want to resemble when you grow up."

It pays to learn from people's mistakes as much as from their successes. And boy, do investors ever make mistakes. In the 20 years ended Dec. 2010, the S&P 500 returned 9.1% a year, while the average investor earned just 3.8% a year, according to Dalbar. We buy high, sell low, mismanage risk, follow the crowd, and trade too much -- rarely with doubt, and always at our own expense.

What are investors thinking when they make mistakes? What's going through their heads? The frame of mind that guides the biggest investment fumbles might be best summed up with a list of famous last words.

"I thought I was getting guaranteed high returns."
Everyone wants that, so no one will get it. Any legitimately "guaranteed" investment will attract so much money that returns will be pushed down to zero -- and negative after inflation. You aren't entitled to anything you're not willing to pay for.

"I want to get in now before I miss more of the upside."
One of the fastest roads to poor results. Buy businesses, not regrets.

"We've come up with a new way to mitigate risk."
A line invariably muttered before meltdowns, collapses, panics, and depressions. Overconfidence is a good alternative definition for "risk."

"We seek to enhance returns with leverage."
Alas, that leverage is seeking to enhance your humility. And it usually wins.

"My broker called and said he has a special opportunity."
Read the book Where are the Customers' Yachts? If you're strapped for time, reading only the title suffices.

"This company's moat is impenetrable."
Warren Buffett once noted: "30 years ago, Eastman Kodak's moat was just as wide as Coca-Cola's moat." Companies' competitive advantages can fall anywhere between weak and strong, but they're never impenetrable.

"It looked like easy money."
If it looked easy to you, it looked easy to millions of other investors who probably bought before you did and will get out before you do. The easier it feels, the harder it will end.

"There's very little downside risk."
Rule of thumb: Take what you think is your maximum downside risk and multiply it by five. Now you're closer to reality.

"Our model has a perfect track record."
The list of models, theories, and patterns that worked until they didn't is never-ending. Nothing can predict the future with certainty -- or even rough accuracy.

"This was a one-in-a-million event."
Maybe it was. Or maybe you severely miscalculated the odds. Reality is almost always the latter.

"Analysts are predicting high growth for years to come."
People wouldn't take these predictions seriously if they knew how bad most analysts' track records are -- and how minimal the punishment for being wrong is.

"My pension is guaranteed for life."
Tragically, I have a feeling millions of Americans will learn in the coming decades how fickle the word "guaranteed" can be.

"I follow the smart money."
The vast majority of professional investors underperform a basic market index. And you rarely know why they're making a certain investment in the first place. Is it a short-term bet? Is it a hedge on another investment? If you can't answer that, you're not following. You're being led.

"How can you argue with a bull market that's been going on for 10 years?"
Because all that tells us it that we're 10 years closer to the end of it than we were when it started.

"You can't afford not to own this stock."
As close as it gets to ringing a warning bell at the top of a bubble.

"There's too much uncertainty in the world to be investing right now."
As close as it gets to ringing an opportunity bell at the bottom of a bear market.

"I'm going to wait on the sidelines until there's more clarity."
The easiest way to ensure you'll miss the bulk of bull markets.

"I invest conservatively. I can't afford to take big risks."
A good sign that you're favoring investments that are riskier than you believe (cash eroding to inflation, bonds at record low rates today, real estate in 2006).

"I'm not concerned about valuation."
An easy motto to follow during bull markets; a humbling lesson to learn thereafter. At best, high valuations rob future returns. More often, they cause irreparable losses.

"I only look at the charts."
A line never said by any successful investor, ever. Investing is about buying good businesses and holding them for a long time. Everything else is Las Vegas without free drinks.

"My brother-in-law has made a killing in these stocks. It's time I jump in."
As Charlie Munger says: "Someone will always be getting richer faster than you. This is not a tragedy." What is tragic is taking risks you don't understand and buying assets at the top of bubbles only because you view investing as a competition with others, instead of a way to secure your own financial well-being.

"It's different this time."
A cliche among famous last words, but easily the most important. Risk will never be eliminated, growth will never be limitless, and markets are never fully efficient. When it comes to big, basic principles of investing, it's never different this time. This truth explains the majority of investment blunders.

Check back every Tuesday and Friday for Morgan Housel's columns on finance and economics

Fool contributor Morgan Housel doesn't own shares in any of the companies mentioned in this article. Follow him on Twitter @TMFHousel. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


Read/Post Comments (20) | Recommend This Article (118)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 02, 2012, at 5:55 PM, somethingnew wrote:

    "I want to get in now before I miss more of the upside."

    In probably 99.9% of investing this holds true however there are always some cases where if you don't get in at a certain time, you'll never get that chance again. Some example are AMZN and Ebay. If you didn't buy during the first month of the IPO date you would have never had the chance to buy it that low again. I'm not advocating that anyone buy on the IPO date which is a terrible strategy since historically most IPOs lose a large part of their value in the following couple years after it IPOs, I'm just giving this as an isolated example.

  • Report this Comment On October 02, 2012, at 6:03 PM, Vismxr wrote:

    I was a trader who became an investor. read Charile Munger's Almanac! My success has been undervalued value stocks, a few growth, and a handful of Leaps & warrants. 15 stocks. Turn off the headlines and you'll see time can beat the machines and you'll have very high probability you'll beat the market with lots less work and more free time. Less is more!

  • Report this Comment On October 02, 2012, at 6:10 PM, richardrollo wrote:

    All very true. The first and the last are the best.

  • Report this Comment On October 02, 2012, at 6:29 PM, xetn wrote:

    QE3: "This time it will be different".

  • Report this Comment On October 02, 2012, at 8:30 PM, WishToRetire2 wrote:

    "Investing is about buying good business and holding for a long time".

    True.

    So by definition the good businesses are the ones whose share prices have gone up after a long time.

    But at the time of share purchase one does not know which businesses these are (e.g. you make the point about moats above).

    So really the point ofd this areticle is that people make foolish decisions based on faulty information.

    But the good information is unknowable.

  • Report this Comment On October 03, 2012, at 1:52 AM, johndog19 wrote:

    "But the good information is unknowable."

    I think it's more useful to consider that the good information can't be taken for granted as truth; good decisions will assume that even good information may be wrong.

    For example, the good information wouldn't suggest that you gamble solely on the basis of the size of its moat. But if the moat is accompanied with reinforcing characteristics, such as solid management and good valuation, you'll have the basis for a more reliable thesis.

    And then since that thesis may also be wrong, good decisions would not allow this company to represent your whole portfolio.

    And since even your well-balanced, shrewdly managed portfolio can sink in a crumbling market, taking that into consideration when planning your retirement would be a good decision, too.

    If all this fails, you probably won't be saying things famous enough to make the list above, you'll just be really, really unlucky.

  • Report this Comment On October 03, 2012, at 10:22 AM, MasterOTUniverse wrote:

    "I only look at the charts."

    A line never said by any successful investor, ever. - How can you be sure of that? Charts are the only truth - really successful investors rarely tell you how they really made their money - why would they?? But I do know one who does only look at charts - everything else - news, fundamentals, opinions, analysts, cnbc is all just noise, turn it all off, watch pure price action and learn how to manage risk/money on something that is ultimately unpredictable seems to be the only way.. unless you are dealing on inside information..

  • Report this Comment On October 03, 2012, at 9:46 PM, shamapant wrote:

    See- The Most Important Thing by Howard Marks....:D

  • Report this Comment On October 04, 2012, at 10:19 AM, RNF62 wrote:

    "We seek to enhance returns with leverage"

    Yes!!!

    That very line was given to me buy a "financial advisor" about a structured product she was offering.

    Guess the outcome!!

  • Report this Comment On October 04, 2012, at 12:42 PM, wyrdmage wrote:

    Perhaps it was already done in the past, but I would like to see Famous Last Words from prominent leaders in investing history.

  • Report this Comment On October 04, 2012, at 2:58 PM, TMFBlacknGold wrote:

    Nassim would be proud if, of course, he didn't seclude himself from the noisy media!

    Keep it up.

  • Report this Comment On October 04, 2012, at 3:35 PM, hbofbyu wrote:

    "You aren't entitled to anything you're not willing to pay for."

    Wow, what would happen if politicians started repeating that line?

    Great stuff. I hope this goes in your next book.

  • Report this Comment On October 04, 2012, at 7:51 PM, mark516119966 wrote:

    Albert,

    I'm not going to click on your goofy link but I have to admire your perfectly timed link you chose relating to this article.

    How appropriate. :)

  • Report this Comment On October 05, 2012, at 7:11 PM, trurl9 wrote:

    "SOS is down 30 percent, it's time to double down!"

    I got the above advice from Black Hole Investments and survived to relate the tale.

    Good reminders, Morgan, thank you.

  • Report this Comment On October 05, 2012, at 9:08 PM, bordereiver wrote:

    One thing I fully agree with MF is that we have to know how we are doing by benchmarking to the S&P 500 or other relevant standard (for bonds for example the Barclays US Agg Bond Index). When I took over my wife's cash, generating enough money to feed a dog or cat but nothing else, I had to explain to her I was going to try other things, not too risky, and showed her how Fidelity could compare our return to the return of someone who just buys a fund tracking the main bond index. We did that and I missed on the first year but for 3 years, 1 Year, and Year to Date am well above the index. Primarily due to me relying on the hated Gross and his sidekick. They do in fact do bonds and fixed income pretty well. On equities have beaten the SP500 consistently and a lot. Thanks to the guys at Motley Fool, with an assist from Morningstar.

  • Report this Comment On October 07, 2012, at 3:37 PM, mikecart1 wrote:

    "I need to start buying stocks! That is how you make real money!"

    99.99999999% of individual investors will never make real money in stocks because they never learn the basics first.

  • Report this Comment On October 08, 2012, at 1:45 AM, garifolle wrote:

    @ mikecart1:

    WOW! you must make a lot of money

  • Report this Comment On October 08, 2012, at 1:53 AM, garifolle wrote:

    "Analysts are predicting high growth for years to come."

    I think that The Mothley Fool does that a lot too.

    And ususally there is a reward attached, not a "minimal punishment".

    When a stock start to receive too many upgrades, it's time to aks questions about that stock.

  • Report this Comment On October 08, 2012, at 7:21 PM, Ragingmoose wrote:

    Regarding risk and conservatism, you did'nt say a word about the concept of MARGIN OF SAFETY.

  • Report this Comment On October 12, 2012, at 12:38 PM, whyaduck1128 wrote:

    "I've got all my money on this one stock."

    I'll believe that from a broker when he/she shows me proof.

    "You can't get any safer than this stock."

    Which doesn't mean it's safe. Or good.

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