Today, we want to highlight the financial equivalent of sticking your finger in a socket repeatedly, of getting back together with that ex all your friends hate, of going to the theater on opening night to watch Charlie's Angels: Full Throttle after paying to see the original.
We're now nearly three years into the financial crisis. I asked some of our top analysts this question:
What's one lesson investors still haven't learned?
Here are their answers.
Morgan Housel, Fool contributor
The mass delusion that homeownership is forever and always something to strive for still seems alive and well. This is unfortunate, since the cult of ownership was a major cause of the bubble.
A recent Fannie Mae (NYSE: FNM ) survey showed that 80% of the population thinks a high homeownership rate is important for the overall economy. Put me firmly in the other 20%. Not only does homeownership hamper labor mobility, but striving for high ownership typically means coercing people into homes who can't afford them. What you want is affordable homeownership, which inevitably means lower homeownership than we currently have.
From the same survey, 60% say a major reason for owning is that it's a good retirement investment; 61% say it's a good way to build wealth; 79% say a major reason to own is having a physical structure where you and your family feel safe.
I beg to differ on all of these. Owning outright can provide a good retirement living situation, but to say it's a good retirement investment (implying pulling cash out) is scary, since you can usually only pull out equity when prices are rising, which makes it easy to become "underwater" when prices fall. Owning can be a good way to build wealth, but leverage makes it one of the easiest ways to lose wealth too. And, seriously, rental homes have locking doors, insulation, and fire alarms. They're pretty safe.
People who can afford it should buy. Everyone else should rent.
Alex Dumortier, CFA, Fool contributor
Investors often allow greed and fear to trump their intellect. It has always been this way and I expect it will always be this way.
Investors have embraced a strategy of "buy high, sell low" during the credit crisis. For example, they added $5.3 billion to domestic equity mutual funds in April, during which the S&P 500 hit a 19-month high. As equities corrected in May and got cheaper -- they turned around and withdrew over $20 billion in assets from equity mutual funds. Stocks' underlying value is less volatile than stock prices; investors should prefer stocks in May at an average price that is 6% lower than in April.
As we get closer to fair value -- stock valuations got ahead of themselves during the monster rally off the March 2009 low -- the SPDR S&P 500 ETF (NYSE: SPY ) becomes more attractive, not less so. In a rational world, investors should be increasing their exposure to stocks as valuations come down.
Tim Beyers, Fool contributor and Rule Breakers analyst
After three years of a debt-fueled financial crisis, investors still treat the balance sheet as if it were the Rodney Dangerfield of financial statements. Is cash really worth so little?
Apparently. If it weren't, cash-rich tech behemoths such as Google (Nasdaq: GOOG ) wouldn't be so unloved. As it is, The Big G, which had $26.5 billion in cash and investments and no debt as of March 31, has badly underperformed the broader market so far during 2010.
Allow me to borrow a phrase from my friend Hewitt Heiserman Jr., author of It's Earnings That Count and co-developer of our market-crushing Scrooge Portfolio. Here's what he says about the balance sheet: "I think one of the great lessons of the late '90s is that investors forgot about this and the rest of the balance sheet."
You know what followed the dot-com delirium. "Businesses" with nothing in the way of assets disappeared from view, wiping out trillions in wealth. Years later, Lehman Brothers went so deep into hock that it went bankrupt at the first sign of trouble.
Stocks are dangerous enough, especially now. Why bet on any company that's in danger of having its chips called in by creditors?
Rick Munarriz, Fool contributor and Rule Breakers analyst
After watching financial stocks and homebuilders rally over the past year and change, I'm convinced that investors believe that every stock -- and every industry -- has a birthright to a turnaround.
It's never as easy as that. Banking is unlikely to ever be the same, so expectations should be tempered accordingly. We're at least several years away -- if not longer -- from a legitimate need for new housing developments, so why bank on the builders of condo towers or suburban builders of cookie-cutter communities?
Shares of developer Lennar (NYSE: LEN ) have more than quadrupled since bottoming out 19 months ago, even though it's still losing money.
Tennis balls bounce back when they drop, but we live in a world where there are also several eggs that don't.
Matt Koppenheffer, Fool contributor
The answer here is easy -- don't run with the crowd! Whether it was the dot-com boom, the housing mania, the financial meltdown, or the more recent European crisis, investors all tended to run in a big herd in the exact same direction.
In some cases it's hard to argue with the reaction of the masses. When the financial world was melting down, investors clearly had Citigroup (NYSE: C ) marked for bankruptcy. With the benefit of hindsight we could look at the (relatively) more stable Citi today and the massive gains its stock has seen and say it was all an overreaction. But without a very healthy dose of government intervention, I'm not so sure that we'd be looking at the same outcome.
But what about global consumer goods giant Unilever (NYSE: UL ) ? It didn't need any government bailout -- in fact, far from it. On the back of major brands like Lipton, Dove, and Surf, the company remained very profitable through the crisis and continued paying dividends to its investors just for sticking around. Yet investors let this stock trade down to a price-to-earnings ratio of 7.4.
This, of course, will never change and most investors will continue to move with the herd. But for Foolish investors [who] keep a clear head on their shoulders through both euphoric and panic-stricken times, everyone else's herd-like mentality can create significant opportunities.
We've cautioned you on five financial mistakes to avoid. Add to our list in the comments section below. Or take a look at our previous roundtable, where we put some popular stocks in rank order.