AAII Journal Editor
5 Memorable Mistakes
A fund manager reveals his biggest investing mistakes.
The Psychology Behind Mistakes
The six common errors of perception and judgment.
AAII Discussion Boards
What was your most memorable investing mistake?
This week’s AAII Sentiment Survey results:
Bullish: 30.3%, down 7.2 points
Neutral: 34.6%, up 2 points
Bearish: 35.2%, up 5.2 points
June 20, 2013
June 13, 2013
June 6, 2013
May 30, 2013
May 23, 2013
May 16, 2013
May 9, 2013
May 2, 2013
April 25, 2013
April 18, 2013
April 11, 2013
April 4, 2013
March 28, 2013
March 21, 2013
March 14, 2013
March 7, 2013
February 28, 2013
February 21, 2013
February 7, 2013
January 31, 2013
January 24, 2013
January 17, 2013
January 10, 2013
January 3, 2013
December 20, 2012
December 13, 2012
December 6, 2012
November 29, 2012
November 22, 2012
November 15, 2012
November 8, 2012
November 1, 2012
Since I am someone who does not like to trade frequently, it was unusual for me to place an order to sell a stock I bought last Friday, June 21, on Monday, June 24. Yet, this is exactly what I did to fix what turned out to be a mistake.
The stock was Anika Therapeutics (ANIK). If you have never heard of the company, it’s probably because Anika’s market capitalization is $224 million. The company makes treatments for tissue protection and repair, with a particular focus on the orthopedic market. I originally liked the stock for the combination of earnings growth, free cash flow, below industry median valuation and rising earnings estimates. My opinion changed when I saw updated information on Saturday, a day after I bought the stock.
One of the two covering analysts lowered his 2013 and 2014 earnings estimates. The revision lowered the 2013 consensus estimate by 8% to $0.98 per share and the 2014 consensus estimate by 5% to $1.14 per share. Since the company is so small, I could not find any reason why the analyst reduced his projections, but I assumed he knew something I didn’t. More importantly, it was a significant change and had I seen it on Friday, I would never have bought the stock. Simply put, one of the reasons I bought the stock no longer applied. So first thing Monday morning, I entered an order to sell it.
There are two things to take away from this, regardless of whether I was writing about Anika Therapeutics or any other investment. The first is if a mistake is made with an investment, correct it as quickly as possible. Don’t hem and haw, just get the stock (or bond or fund) out of your portfolio. Any realized loss will have a reasonable chance of being smaller than the potential loss incurred by holding onto an investment you know you shouldn’t. What often separates good investors from average or poor ones is the ability to consistently stay disciplined.
The second is to realize there is a point where you just need to take a leap of faith rather than considering every possible nugget of information. Conduct an adequate level of due diligence, make your decision and move on. If you worry about looking under every unturned stone, you will find yourself unable to make a decision about when to buy or sell.
Could I have found out about the downward earnings estimate revision prior to Saturday? Possibly, but there was nothing on the newswires about it. Plus, before buying the stock, I looked at the data in our Stock Investor Pro program, scanned through the Form 10-K (an annual report required by the Securities and Exchange Commission), reviewed the most recent earnings report, read Value Line’s report on the company, and scanned the recent news. I also looked at Anika’s chart. In other words, I did the research and the downward revision was new information I saw during my weekly portfolio review. My process worked, and I stayed disciplined enough to follow it.
No process is foolproof. But if you consistently follow a disciplined approach based on sound investment theory, you will do well over the long term, especially if you are willing to admit and quickly fix your mistakes.
AAII Conference Speaker Wins Prestigious Award
Jason Zweig was awarded the prestigious Gerald Loeb Award for his Wall Street Journal column, The Intelligent Investor. The Gerald Loeb Award is one of the highest honors a journalist can receive, and I’m very happy for Jason.
You can see Jason speak at the AAII Investor Conference this November in Orlando. He will discuss investing lessons from Benjamin Graham and behavioral finance. Joining Jason will be several other great speakers including keynotes Robert Shiller and James O’Shaughnessy. If you haven’t made plans to attend, register today before the conference sells out.
More on AAII.com
- 5 Memorable Mistakes and the Lessons I Learned – Fund manager John Deysher revealed his five biggest mistakes in this 2006 AAII Journal article.
- The Psychology Behind Common Investor Mistakes – Former finance professor Doug Van Eaton discussed six common errors of perception and judgment in this 2000 AAII Journal article. (PDF format)
- What Was Your Most Memorable Investing Mistake? – Tell us on the AAII Discussion Boards.
- Don’t forget to take the Sentiment Survey.
The Week Ahead
The U.S. financial markets will be closed on Thursday in observance of Independence Day. The U.S. stock exchanges (NYSE and NASDAQ) will close at 1:00 p.m. Eastern time on Wednesday. Both the stock and bond markets will operate on normal hours on Friday. The AAII office will be closed on Thursday and Friday.
The only S&P 500 member company scheduled to report next week is Constellation Brands (STZ), on Tuesday.
The economic calendar is pretty busy for a holiday-shortened week. The June ISM manufacturing index, the June PMI manufacturing index and May construction spending will be released on Monday. Tuesday will feature May factory orders. The June ADP Employment Report, the June ISM services index and May international trade data will be published on Wednesday. Friday will feature the June jobs data—including the unemployment rate and the change in nonfarm payrolls. Weekly initial jobless claims will also be released on Friday, a day late because of the Fourth of July holiday.
AAII Sentiment Survey
Neutral sentiment rose to a 12-week high, as individual investors became more cautious, according to the latest AAII Sentiment Survey.
Bullish sentiment, expectations that stock prices will rise over the next six months, dropped to 30.3%. This is the fifth consecutive week and the 15th out of the last 18 weeks that bullish sentiment has been below its historical average of 39.0%.
Neutral sentiment, expectations that stock prices will stay essentially unchanged, rose 2.0 percentage points to 34.6%. This is the highest neutral sentiment has been since April 4, 2013. It is also the fifth consecutive week and the 11th in the past 14 weeks that neutral sentiment is above its historical average of 30.5%.
Bearish sentiment, expectations that stock prices will fall over the next six months, rebounded by 5.2 percentage points to 35.2%. This is the third time in four weeks that pessimism is above its historical average of 30.5%.
This week’s changes in bullish and bearish sentiment are a continuation of the ongoing volatility we have seen in the weekly results since March. At current levels, all three measures—bullish, neutral and bearish—remain within their typical historical ranges.
What the results do show is ongoing cautiousness about the direction of stocks prices. Many individual investors remain encouraged by signs of continued economic growth and the length of the current rally. Others are concerned about prevailing valuations, the slow pace of economic growth, interest rate uncertainty and a lack of progress on key issues by Washington politicians.
This week’s special question asked AAII members how, if at all, the recent rise in bond yields has influenced how attractive they view stocks right now. Slightly more than four out of 10 respondents (42%) said the change in bond yields has had no impact. Roughly two out of 10 respondents (21%) said stocks look more attractive now. About 11% of respondents said stocks are now less attractive.
Here is a sampling of the responses:
- “Interest rates need to go up a lot more for bonds to be more attractive than stocks.”
- “The rise in rates has no influence on me at the moment. I am looking to stay diversified.”
- “It has had no influence on me. I am primarily a stock investor and remain so.”
- “The rise in bond yields has put dividend stocks on sale, and they are quickly approaching buy points”
- “Stocks are getting more attractive as the sell-off continues.”