The Biggest Irrational Fears for Investors

Alexander Green
by Alexander Green, Chief Investment Strategist, The Oxford Club
irrational fears 0

The week before Halloween, my colleague Rachel Gearhart asked a group of Oxford Club investment analysts to write a few words about our most irrational fear and how we overcame it.

It’s a good question and - while I’ll get to my answer in a moment - it deserves a clarifying comment.

Many investment fears are entirely rational. After all, the capital you put at risk in the financial markets is real money. Money that you earned, paid taxes on and saved rather than spent.

The knowledge that it could suddenly become a substantially smaller sum or - in a worst-case scenario - vanish entirely is not an idle consideration.

Yet, as experienced equity investors know, volatility is simply the price of admission.

(Although it has been so rare in recent months that I wonder whether the next “refresher” won’t come as a jolt to many.)

The reason Treasury bills and certificates of deposit offer virtually no risk of loss is because your return will be minimal and - after inflation - close to zero.

This is not satisfactory for people looking to build wealth or reach financial independence. And so we migrate to the stock market for higher returns - and the inevitable fluctuations that come with them.

How you respond to those fluctuations is important.

As I told Rachel, when I first entered the money management business 32 years ago, I was often afraid my winning stocks would suddenly turn into losers. That irrational fear led me to sell too soon.

“After all,” I told my young self at the time, “you never get hurt taking a profit.”

This is true only if you have the fortitude to never look at the stocks you sold again. Because a stock you’ve cashed in that goes up and up and up is a painful sight.

If you sell too late, you can lose 100% of your investment. But if you sell too soon, you can lose many hundreds of percentage points - indeed thousands of percentage points - of upside.

Readers who owned Apple (Nasdaq: AAPL), Amazon (Nasdaq: AMZN) or Netflix (Nasdaq: NFLX) a decade ago know exactly what I mean.

It’s bad enough that many investors don’t remain calm in a down market. But others can’t remain calm in an up market either. They get so excited about their gains that they feel compelled to lock them in straight away.

Then they regret it. If this has happened to you, you’re in good company.

Legendary fund manager Peter Lynch said in a recent Forbes article, “My biggest mistake was that I always sold stocks way too early... I was dumb. With great companies the passage of time is a major positive.”

And in his investment classic One Up On Wall Street he wrote, “Selling your winners and holding your losers is like cutting the flowers and watering the weeds.”

Of course, not all great companies remain great.

There was a time when Montgomery Ward, Circuit City, RadioShack, WorldCom, Blockbuster, Lehman Brothers, Enron, Borders and Bear Stearns were all up-and-coming growth stocks.

How do you hang on to the winners longer and get rid of the losers sooner?

Regular readers already know. It’s our trailing stop strategy. This keeps you in stocks while they are in a pronounced uptrend. And it gets you out of them once the trend breaks down.

It’s not a perfect solution. (No real-world strategy is.) But it works.

Good investing,

Alex

Thoughts on this article? Leave a comment below.

The Perks of Holding On to Your Winners

Alex eventually overcame his tendency to sell winners early - and his Oxford Communiqué subscribers are glad he did.

By holding on to good equities for years or decades, Alex has helped subscribers score several triple-digit gains.

Equity Residential Properties Trust (NYSE: EQR) is a great example, having gained 290% since Alex initially recommended it in 2001.

Here’s Alex checking on the REIT earlier this week...

REITs are highly liquid. They allow you to own a diversified portfolio of income-producing properties in a single investment.

They have a low correlation with the stock market, making REITs a great portfolio diversifier. And because they are required to pay out at least 90% of their net income to shareholders each year, they are also reliable dividend payers.

Some analysts believe the higher yields make them vulnerable to an interest rate rise. But there is no evidence to support that.

During five of the six periods since 1978 in which the Fed lifted short-term rates, REITs generated positive returns and outperformed both U.S. stocks and bonds.

That brings me to Equity Residential Properties Trust (NYSE: EQR) in our Oxford All-Star Portfolio.

Equity Residential owns or has investments in 302 properties consisting of 77,498 apartment units located primarily in Boston, New York City, Seattle, San Francisco, Southern California and Washington, D.C.

It was founded by Sam Zell and Bob Lurie - two of the most successful property moguls in the nation - with the philosophy of investing in properties at the right price and hiring the best people to manage them.

The trust buys, builds and rehabs apartments and condos - for every budget and lifestyle - in growth markets where people most want to live.

The meltdown in home prices during the recent financial crisis took the shine off the idea that everyone should be a homeowner. And in this sluggish economy, many consumers either can’t afford a home or can’t qualify for the mortgage.

So the rental market is strong.

The trust takes in more than $2.4 billion in annual revenue. It enjoys an operating margin of 34%. And you’ll collect a 2.9% dividend here, too.

The executives at Equity Residential are actually looking forward to the Fed raising rates. Why? Because higher rates indicate an improving economy, strong job growth and rising wages. That means increasing demand for industrial space, office space, retail and housing.

- Samuel Taube with Alexander Green

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