SCOTT REED: Rule No. 7: Never confuse genius with a bull market

SCOTT REED

SCOTT REED

I don’t think it has gotten past most investors that the Dow Jones Industrial average (the most watched index in the world) has hit new all-time highs lately. We are a far cry from the depths of depression that invaded our minds during the Great Recession. The Dow bottomed out in early March 2009 and has been on a tear ever since. With very little down time, pretty much all ships have risen in this rising tide.

It was interesting to me to hear people talk about what was happening to them in the down market. I don’t recall one single conversation where someone said, “I just picked the wrong stocks. If I had done a better job this wouldn’t have happened to me. I must just be stupid.”

Instead I heard people say, “What is happening to me? The banks caused this problem! If the federal government would do their job, none of this would have happened!” It was anyone else’s fault but my own.

Now we are in a flat-out bull market and everyone is walking around like they are the smartest minds in the industry. Instead of “Look what the market did to me,” they are now saying, “Look at how much money I made last year,” “Look at what my investments are doing” and “Look at how smart I am!”

It is natural to want to take credit for the good things that happen to you and blame someone else for the bad things, but it is dangerous to start believing that it is true. My father told me early in my career that I would do well to remember that when a client lost money, it was my fault, but when he made money, it was his “fault.”

My dad was right. That is a pretty accurate portrayal of how things have gone over the nearly three decades I have been in the investment business.

It’s all rather harmless until you start believing your own press and start making investment decisions based on the fact that you are a financial genius. There are very few financial geniuses in the world. I can count the ones I consider geniuses on one hand and that spans the past 100 years. There are a lot of geniuses that invest, but that’s different than having investment genius. Most people that are cloaked in the appearance of genius are simply lucky and, at some point, that luck will run out.

I believe that Proverbs 16:18 is true: “Pride goes before destruction.” Every time in my career I began to think I knew more than everyone else, I found out I was wrong. I am now very comfortable in knowing that I don’t have the silver bullet of the investment world. I rely on empirical evidence and historical data to determine how to best invest.

However, I have not given up on using my gut feelings; I just save them for ordering dinner.

Scott Reed is CEO of investment advisory firm Hardy Reed in Tupelo. Contact him at (662) 823-4722 or sreed@hardyreed.com.