Why do regular people always under-perform investment advisers, who in turn under-perform the market? It’s tempting to say it’s because the pro’s know more, are better educated, have more money, and/or better access to information. These advantages certainly make a difference, but really only on the margin. The real reason was identified back in 1949 by one of the founding fathers of modern security analysis, Benjamin Graham, who wrote “The investor’s chief problem, and even his worst enemy, is likely to be himself.”

This week’s theme is all about investing, and how keeping your emotions under control, ignoring whatever the hot investment of the day is, and sticking to your long term plan is the best way to ensure a prosperous future.

The Intelligent Investor: Saving Investors From Themselves (Wall Street Journal)
This article talks about how difficult it is to keep a level head when everyone else is losing theirs. Whatever the hot investment of the day, it’s very hard to stay away from it when everyone else is making money.

Five things I try to do on this Blog (The Irrelevant Investor)
The biggest danger an investor faces when investing in the stock market is not staying invested. Investors who try to time the market, sell at the bottoms, and buy near the tops. After repeating this pattern for a couple of cycles, they give up and label stocks “dangerous”. It’s when things look really bleak that keeping a steady head, and doing what at the time feels wrong, is most important.

Correlations aren’t Constant (The Reformed Broker)
This one is a bit on the technical side but the message is the same. Investors who patiently stay with their asset allocations over the long term, by buying “losers” and selling “winners”, tend to do very well. Everyone knows this but yet very few can actually do it. It’s extremely hard to sell that high flying fund that’s making you feel happy, and use that money to buy that dog that’s making you sick to your stomach every time you look at it.

The subprime mortgage crisis wasn’t about subprime mortgages (Fortune)
This article may seem out of place at first glance, but it very much belongs in this list. There was a time when the vast majority of people in the US truly believed that real estate could never go down, never-mind actually crash. This is the belief most Canadians have today. The arguments as to why this time is different are countless and eerily similar to the ones heard in the US. One argument heard a lot these days is how Canadian banks are far more responsible than US banks, and how the US crisis was caused by loans that are not even available in Canada, so no reason to worry. This article throws some cold water on that idea by describing exactly which mortgages caused the crisis. Real estate has a place in an investment strategy, just like any other asset class, but it needs to be kept within those limits. I know I won’t convince die hard wanna-be real estate magnates, but maybe I’ll give a pause to one or two people before they make some terrible mistakes.

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