If a professional baseball player can get on base four out of 10 times and doesn’t bet on his own team or take steroids to enhance his performance, he will breeze into the Hall of Fame.
If a guard in the NBA can hit four out of 10 three-point shots during his career and stays clean, he can pretty much expect the same thing.
I remember hearing Tiger Woods say a few months ago that he expects to hit only two or three really great shots per round of golf. Roger Federer, possibly the greatest tennis player of all time, finally won the French Open this year after losing four times in a row to his archrival, Rafael Nadal.
It is difficult to be great, and even when you achieve greatness you can still expect to fail often.
I don’t believe that investing is any different.
Those of you who expect to win all the time are living in a world other than the one in which I live. An investor in private equity deals told me once that the problem with buying private equity was that you could buy 10 deals in a row that looked very good and still only two or three would make you money.
One of the biggest advantages to investing, especially in the stock market, is that there is a long-term upward trend to investing in stocks. It is a big advantage because even average investors can make money over the long run. With an average long-term performance number of around 10 percent for equities, you can lose more than you win and still have a reasonable expectation of beating inflation and creating some real wealth.
One of the biggest obstacles to having positive investment returns is not the market itself. I know it sure feels that way right now, but that isn’t your biggest hurdle.
A big hurdle is making sure that you don’t have something in your portfolio that can cause a permanent loss of income, which is when you lose so much money on an investment that it is unreasonable to think that you can recover that loss over your desired time horizon.
Unfortunately, that happened to a lot of investors in this past market decline. It happened during the bear market of 2000-2003 as well, but not in such prolific numbers.
This past bear market took down those investors who had always considered themselves conservative because they always invested in conservative bank stocks and those stocks would never let you down. They paid very nice dividends and, by definition, were the foundation of the investment world. Obviously, bad things can happen to what we perceive to be good stocks.
Bad things can happen
So what can we take away from this that will stop us from making the same mistake again? We need to realize that even “good stocks” can cause a permanent loss of income if we happen to own too much at the wrong time.
You can sit around beating yourself up over having not seen the demise of your favorite security, but the problem was that you just owned too much of a good thing.
Like eating cotton candy in a convertible on a hot day; it starts out well but can turn into a sticky mess if you keep it too long. And the more you have, the bigger the mess.
I know that most of you “concentrated position anonymous” people out there understand this on some level, but it is a very emotional thing to sell a stock that has treated you so well. You have to deal with abandonment issues and all other kinds of feelings if you decide to let go of your large positions. It’s just easier to keep it and hope for the best. And that’s how things get so out of balance.
Remember – no matter how much you love your stock, if you have more than 10 percent of your portfolio in one stock, you need to start looking for an exit strategy that will get you down to 10 percent no matter what the research report says.
Because it is not the things you can see that will take you down, it’s the things you can’t see that can provide you with a life changing-experience that you would rather not have.
Scott Reed, CIMA, AIF, is CEO of Hardy Reed Capital Advisors in Tupelo.
Scott Reed/Special to the Journal