No, no, the title of this article probably isn't what you think it is. I'm not introducing an amazingly effective investing style called Insane Investing. We're not launching an Insane Investing newsletter.
I can see why you might've been confused. There's a lot of over-the-top language in the consumer world these days. My bank, for example, now offers "Extreme Checking" accounts. This is not the Age of Understatement, I'm afraid.
"Insane Investing" is, rather, the many irrational and sometimes puzzling behaviors we investors often exhibit.
Bad and worse
Our irrationality rears its ugly head in all kinds of areas. Consider international tragedies, for example. In "Problems, Problems, Everywhere," I detailed some shocking statistics about the state of our world. Regarding the Asian tsunami disaster of 2004, which so many of us responded to generously by emptying our pockets, I said: "To be blunt, the tsunami killed around 275,000 people. It was a one-time event that occurs extremely rarely in history. Poverty kills around 210,000 children every week." I asked before and I'll ask again: Doesn't this pattern of giving seem kind of, well, irrational? It's important to help out when big disasters strike -- but there are bigger ongoing disasters that we too often forget about.
[Fortunately, this is the perfect time for you and me to do something about that. Our ninth annual Foolanthropy charity drive is under way right now. We've raised more than $2 million for some outstanding organizations in the past, and we're raising money for five worthy enterprises this year. Please take a few minutes to learn about them and consider chipping in with us.]
Investors gone mental
Consider other ways our irrationality surfaces. Just think of a stinker in your portfolio. If you've lost $1,000 on one stock, chances are you're waiting for the price to go up again so that you can regain as much of that $1,000 as possible. That's not sensible, though. If you no longer have much confidence in the company -- putting the stock aside -- you'd be better off moving what's left of your money into another stock that you are confident about. (If you're a Calpine shareholder from the glory days of $55 per share in 2001, staring at a 21-cent stock right now, you're probably nodding your head.) You're more likely to make back that $1,000 in the stronger company, right? And does it really matter which stock gets you the $1,000? I thought not.
We're also irrational during the stock-picking process -- and trust me, I'm no exception. I've bought on hunches and on very little research. I've bought mutual funds without examining fees or getting the skinny on the manager. And I've paid the price for my mistakes. I'm mostly reformed now -- but still not perfect.
I know now to perform my due diligence on any potential investment. Or -- if I don't have the time, expertise, or brainpower -- I seek investing ideas from people whose investing styles and track records I respect. So far, that's served me well.
Wise up
You can do the same, if you're interested. The Internet has significantly leveled the playing field in favor of individual investors. Want to read up on SEC filings, management teams, expenses, and more? All you need is the Web and some free time.
You can also check out our Foolish resources. Shannon Zimmerman, analyst of Motley Fool Champion Funds, has an impressive track record thus far. Champion Funds has nearly doubled the market's return since inception, returning 16% for subscribers, vs. just 9% for its benchmarks.
Shannon's recommended 33 Championship-caliber funds to date. An impressive 30 out of the 33 have made money for subscribers, and 12 are up more than 20%. T. Rowe Price New Horizons (FUND:PRNHX) is one of the standout stars, up some 33% in a little over a year, thanks to holdings in companies such as Nextel Partners (NASDAQ:NXTP), NII Holdings (NASDAQ:NIHD), Coventry Health Care (NYSE:CVH), Legg Mason (NYSE:LM), and Omnicare (NYSE:OCR).
Will every pick outperform? Of course not. But tapping into the expertise of a resource like Champion Funds puts proven market beaters to work for you. Investing your money doesn't have to be an isolated adventure.
Behavioral economics
There's actually an entire academic field devoted to the concept of people making lousy economic choices. It's called behavioral economics, and it studies why people make less-than-optimal decisions even when they should know better.
Learn more on our Behavioral Economics discussion board (or just pop in to see what others are saying), and in these articles:
Don't let insanity get the best of your investing dollars -- you don't want to end up a behavioral economics case study. If you'd like a sane, smart, strategy, Shannon is offering a free 30-day trial to his Champion Funds newsletter service. You'll receive one high-quality fund recommendation per month, as well as access to all past picks, model portfolios, interviews with fund managers, and the Foolish community discussion boards, where like-minded investors share ideas, wisdom, and insight. Click here to learn more.
This article was originally published on Aug. 5, 2005. It has been updated.
Selena Maranjian's favorite discussion boards include Book Club, The Eclectic Library, and Card & Board Games. She owns shares of no company mentioned in this article. For more about Selena, view her bio and her profile. You might also be interested in these books she has written or co-written: The Motley Fool Money Guide and The Motley Fool Investment Guide for Teens . Coventry Health Care is a Motley Fool Stock Advisor recommendation. The Motley Fool isFools writing for Fools.
