In the spirit of St. Patrick’s Day, we’re taking a look at some popular investing myths that seem to captivate investors.
Often times, investors are distracted by a glitzy, “in the moment” investing tactic that promises the proverbial pot of gold. But, as many asset managers will tell you, these impulsive strategies are more likely to get you a lump of coal.
To follow or not to follow
One common investing pitfall is adopting the lemming mentality and following the crowd—sometimes leading you off the infamous cliff. “A favorite myth of mine is investors falling in love with an investment while only looking at recent results and making decisions based on what the crowd is doing,” says Barry James, President and Portfolio Manager for James Investment Research. “Missing is the idea that the crowd is often wrong, especially at major turning points.”
For example, James points to the internet boom in 1999, which acted like a wave sweeping over the investing public. “One retired fireman told me he could make 40% a year and didn’t need our services anymore. Despite our advice to the contrary, another long term client fired us so he could put all his money in the internet startup Planet Rx,” he says. “Our nation’s love affair with the internet was seen as invincible. However, the internet bubble burst and those caught up in it, like those clients mentioned, saw major losses.”
Bigger isn’t always better
Much like some investors getting caught up with the flash in the pan trends, some also only think big, popular names are the way to go, according to Lamar Villere, CFA, Portfolio Manager for Villere & Co. His firm’s approach focuses on small, undiscovered stocks as Villere believes small-caps are poised to take the lead in 2016 and beyond.
“If we look back to 1926, U.S. small-caps have outperformed large-caps by about two percent annualized,” says Villere. “Last year, however, large-caps outperformed small-caps; if history is to repeat itself, small-caps have the potential to resume the top spot in the near future.” Villere explains that the companies they focus on are potentially insulated from currency fluctuations because the bulk of their revenues are domestic, as opposed to multinationals that face currency risk.
All that glitters is not gold
The point? Investors shouldn’t be mesmerized solely by the allure of large, household names. Thinking they are too big to fail can get you in trouble.
The lesson investors can learn is that process is more important than following the hottest trend. Substance over flash applies to more than just dating, and should apply to your investing style, too. “Many were telling us our conservative, balanced approach to investing was old fashioned, and we didn’t seem to know what we were doing,” says James. “We have seen many bubbles over the years, and while they ran mightily for a bit, those who bet everything on them were hurt.”
So while you may celebrate St. Patty’s Day festooned in dazzling, shiny greenery—keep that to your happy hour festivities and out of your investment style. No matter how tempted you may be by flashy, popular investments, future you will be grateful that you stuck with a time-tested process rather than having chased a rainbow.
Note: James Investment Research and Villere & Co. are clients of SunStar Strategic.