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I think just about anyone you ask would say they'd like to retire a millionaire. Today, I'll tell you why so few reach that goal and how you can make yourself one of the lucky few.
Out of touch with ourselves
We aren't hardwired to be great investors. On average, we humans are god-awful at predicting our own behavior in future settings.
That's why we set resolutions at New Year's that only last one month. It's why after a night of imbibing too many beverages, we swear off alcohol altogether, only to find ourselves at a bar the very next night.
Why are we so bad at this?
Dan Ariely, author of Predictably Irrational, says it's because, "Even the most brilliant and rational person, in the heat of passion, seems to be absolutely and completely divorced from the person he thought he was."
In simpler terms, Ariely argues that humans simply can't imagine how they'll feel in the future when the environment around them will be drastically different.
What can we do about this?
It seems to me that the only way to combat this is by setting up systems to keep our emotions in check.
As my fiancee likes to say, it's far easier to control the situation you put yourself in than to control yourself once you're in that situation. Not learning to control our emotions can wreak havoc on our retirement portfolios, causing us to buy stocks high and sell them low.
Here are a few simple steps I believe can make us all better investors.
- Create a watchlist. This allows you to keep tabs on companies. It's one way to ensure that you never put your hard-earned cash down on some "hot stock" you know nothing about.
- Write a short memo before buying a stock. I always write down the reasons I'm buying a stock and what would have to happen for me to consider selling. I keep it to a half-page because if I can't explain my reasoning in that space, I probably don't understand the company enough to invest in it.
- Wait before buying or selling. I'll visit the bookstore on Monday, and whatever book still piques my interest on Friday, I'll buy. The same goes for stocks: Impulse buys usually don't turn out well. Cold, hard, calculated ones do!
- Join a community to talk things over. Whether it's with your spouse, an investing group, or fellow Fools on our boards, join a community of people who will help hold you accountable.
A few case studies
A few real-life examples could serve as excellent examples. Below are five stocks that our Motley Fool CAPS community believes are excellent buys -- as they are all rated five stars. But over the past month, the market has decided to punish the companies for varying reasons.
Price Change, Previous Month
|RAIT Financial Trust (NYSE: RAS )||(32%)|
|Manitowoc (NYSE: MTW )||(27%)|
|VASCO Data Security (Nasdaq: VDSI )||(26%)|
|Hanger Orthopedic (NYSE: HGR )||(22%)|
|TriQuint Semiconductor (Nasdaq: TQNT )||(24%)|
Source: Yahoo! Finance, Fool.com.
If you didn't have any systems in place when these companies started their free falls, it would have been hard not to sell. I'm not saying any of these companies are sure winners, but by giving yourself time to think things out, you may have changed your mind.
RAIT, which owns multifamily properties for rent, has been positioned excellently to benefit from the housing crisis. Instead of buying property, more people are opting to rent space from companies like RAIT. The company is taking a hit due to its exposure to the real estate financing business, but operating income came in at $4.4 million last quarter, as compared to a $4.6 million loss during the same time last year.
Though Manitowoc has been able to raise its top line recently because of advances in its cranes and food services divisions, net losses -- and debt -- continue to mount. The market may have been right to punish this stock.
Vasco investors, on the other hand, probably pulled the trigger too quickly. In the short term, profit didn't grow as quickly as revenue because lower-margin products dominated the quarter. Long term, however, Vasco has tons of opportunity in front of it, especially because of its focus on cloud computing security.
Hanger, as well, seems to have been sold too quickly by investors. The company beat both earnings and revenue estimates, and reaffirmed its full-year guidance. Fool Anders Bylund has one theory for the drop: "[The drop] looks a lot like one large investor dumping a large batch of shares in disgust." I guess that investor didn't wait a day to make a dispassionate decision.
And finally, TriQuint seems to be something of an enigma. Though it reported earnings in line with estimates, guidance was cut severely. The company is moving away from 2G chips and focusing on 3G and 4G chips instead. The changeover will produce a drag on earnings.
As you can see, it takes time to get the whole story, and putting a system in place will help give you the time it takes to digest all of the relevant information.
If, after some reflection, you think you would benefit from a buying and selling system, I think the special video I'm offering -- "Watch This Before the Market Crashes" -- could help ease your fears. It's yours today, absolutely free!