In the examples above, actual earnings did not turn out as the market had expected. And in the sometimes topsy-turvy world of investing, expectations play a key role in determining if a stock’s price rises or falls when actual earnings are reported.  So who exactly is the market in this earnings expectations dance?  It’s the consensus of all the analysts from all the major research firms who follow the company in question.  The consensus of expert expectations can be very different from your own expectations, and thus the possibility for the price of the stock in question to go against logic and common sense.

Investors who have a moderate amount of experience eventually learn from observing this phenomenon.  They figure out that the market is forward-looking. Security prices are driven both by earnings themselves, and by consensus earnings expectations  Prices change as these expectations change or are proven to be off the mark.  Over the last few years, we have seen a big increase in the number of research and reporting services that track and analyze expected earnings estimates.

Services such as Zacks, First Call, Standard & Poors, IBES, and others provide consensus earnings estimates by keeping track of the estimates of thousands of investment analysts at hundreds of investment firms. The key question is, how can a regular investor take advantage of this apparent disconnect between reality and expectations?  There is no simple answer to this question, but an entire industry exists to support the notion that it can be done.  All that’s required is that you pay someone who claims to be “in the know” about these things, and they will provide you with a list of upcoming earnings announcements, along with the corresponding consensus expectations, and a prediction (wild guess) about which companies will beat those expectations, and which will miss the mark.

Caution:  Do not get bamboozled into paying someone for this kind of information, because it’s almost entirely guesswork.  The average investor can find far better uses for his or her limited investment research budget than this.  There’s a sucker born every minute.  Don’t become one by believing that anyone can tell you ahead of time which companies will beat their expectations.

                                                              Paying                Current               5 Yr Div

Company                                            Since                    Yield                     Growth

3M                                                          1916                        2.5%                          3.6%

Coca Cola                                              1920                       2.7%                          8.7%

Abbott Labs                                            1924                       3.4%                         10.2%

Colgate                                                   1895                       2.5%                         12.7%

General Mills                                          1944                       3.3%                          11.4%

Johnson Controls                                   1887                       3.1%                         10.8%

United Technologies                             1936                        2.4%                         12.8%

Church & Dwight                                   1901                        1.4%                          39.2%

• Feel twice the pain of a dollar loss than pleasure of a dollar gain.  This is referred to as Myopic Loss Aversion by experts in Behavioral Finance.  There’s nothing wrong with having a heightened sensitivity to the possibility of losing money, as long as it doesn’t interfere with the ability to make good investment decisions.  But the data shows that most investors do let this loss aversion get in the way.

• Focus more on avoiding down markets than participating in up markets (for example, a retirement plan invested only in money market funds.)  Which is worse: being invested in a declining market, or not being invested in a rising market?  Answer:  they’re equally bad.  But most investors don’t see things that way.  They don’t view opportunity cost (being in cash when the market is rising) as somehow less real than actual paper losses.  In fact, a paper loss is a paper loss regardless of which way the market goes.

• Fear making any mistakes even though professional investors make plenty.  This fear is often paralyzing at exactly the wrong time.  The markets are constantly presenting us with opportunities to buy low and sell high.  But investors who are too fearful of losing money often balk at buying when prices are cheap.  This leads to severe under-performance by retail investors in general.

• Project short-term investment performance, bullish or bearish, to infinity.  Finance experts call this “extrapolation.”  It comes from the conventional wisdom that says what happened in the past is likely to continue to happen in the future.  This is true for many aspects of our lives, but in the world of investing, it’s a dangerous misconception.  There is no evidence to support the claim that stocks that have gone up recently will continue to go up, or vice versa.

• Tend to “fight the last war.”  I see this all the time in my coaching practice.  When a major market event takes place, investors tend to believe that the event in question is bound to repeat itself again in the near future.  For example, there is a widespread belief among investors today, that the U.S. is about to fall back into a ‘double-dip’ recession.  Yet, the evidence is much more supportive of the opposite outcome.  This fear of history repeating leads investors to wait longer than they should to get back into the market after a big fall.

• Focus too much on companies or industries that they are familiar with (only company stock in a 401K.)  There are approximately 8,000 stocks in the U.S. market to choose from, yet most investors limit their horizons to just the companies they are familiar with.  This familiarity bias is a significant limitation on potential opportunity.  Peter Lynch was a famous advocate of buying stock in companies that you know well, but he was actually giving bad advice.

• Slow to sell a losing investment, but quick to cash in on a winning one.  One of the most difficult thing for many investors to do is to resist the temptation to sell a winning stock.  This tendency to ‘cash in’ on your winners comes from a desire to avoid the regret that would come from watching those paper gains evaporate if the stock were to go back down again.  The fear of regret is many times stronger than the desire for gains for many investors.

• Have difficulty balancing risk and reward, often going to extremes.  For many investors, it’s a matter of “all in” or “all out.”  But going all out (selling your stocks when you’re afraid of a market decline) is actually an extremely risky strategy.  Why?  Because you are placing all your chips on a single asset class – cash – and that’s never a good thing.

These are just some of the most common behavioral mistakes that retail investors make.  The end result of falling victim to these errors is that the average retail investor only captures about 3/5 of the gains that the market offers.  The long term average return of the market is about 9.5%, but the average investor only makes about 5.4%.

One way to improve your results would be to pay attention to the thought process you go through the next few times you make an investing decision.  Look for the traps and mistakes listed above.  If you can identify one of these mistakes before you do the trade, you can re-think your strategy and possibly save yourself some money.

Of all the mistakes investors make, the most costly one is going ‘all in’ or ‘all out’ when the market goes to extremes.  Try to bring more balance to your portfolio by making a rule that you will never go all in or all out.  If the market looks very scary, consider selling just half of your stocks instead of all of them.  That way, you won’t be severely punished if you end up being wrong.

The question is not whether you would benefit from expert advice. (Independent, peer-reviewed studies show that investors who seek professional advice do significantly better than ‘Do-It-Yourself’ investors.) The question is, which expert should you listen to?

If you’ve done any research on this, I’m sure you’ve noticed that there’s a wide range of opinion out there about what’s the best way for you to invest your money. And many of these opinions are in direct conflict with each other. For example, should you go with the ‘buy and hold’ school of investing, or the ‘market timing’ one? Should you buy individual stocks, or use mutual funds? How much of your assets should you have in stocks, and how much in bonds? If you’ve searched the internet for answers to these kinds of questions, then you know that the answers being offered are all over the board.

Part of the deal that comes with taking advantage of all that free advice floating around in cyberspace, is the great difficulty in separating what’s real from what’s just marketing gimmicks. And making matters worse, once you pick the expert you are going to follow, you have to make a commitment to their particular approach to investing. Every time you get frustrated and change experts, you have to reset the clock back to zero. All experts agree that you have to stick with their program long enough to give it a chance to work.

So you know you can use the expert advice, but you don’t want to pay the fee because you think you can find it online for free. I’m going to argue that for most people, paying for expert advice is not only worth it, but that not paying for it could be one of the biggest mistakes you’ll ever make as an investor.

Let’s start with the amount of money we’re talking about. The ‘fee’ you pay for personal advice doesn’t have to be a lot of money. There are many ways to get basic, decent advice for a reasonable fee. Some of the best and least costly advice comes from fee-only experts who charge an hourly rate for the time they actually spend working with you. There’s no wasted effort there.

Let’s say you need 3 hours of expert help in setting up your IRA or 401k allocations. You can hire a fee-only adviser for $150/hr (on average, according to the latest industry surveys.) So, for a total, one-time cost of $450, you could accomplish what might otherwise have taken you weeks or months to do on your own.

In addition to the time saved by paying an expert, there’s also the issue of the soundness of the decision you make. An expert will ask you questions about your ‘big picture’ financial situation, and recommend an allocation that fits you well. His incentive for doing it correctly is that his reputation is at stake, and he probably gets most of his clients through referrals.

If, on the other hand, you decide to go it alone and figure out your asset allocations by yourself, here’s what is likely to happen. You will save yourself $450. You might get lucky and end up with an allocation that’s just as good as what the expert would have given you. But there’s a fair chance (at least 50%, in my experience) that you will end up with an allocation that’s good, but not optimal for your circumstances. And even a small miscalculation can end up costing you much more than the $450 you saved. Here’s how.

Let’s say that the allocation you chose from the books you read, or the websites you visited, turned out to be 70% stocks, 25% bonds, and 5% gold. If it turns out that – based on your age, savings rate, and risk profile – you should have allocated 75% to stocks instead of 70%, the impact on your wealth over the long run could be thousands of dollars. Are you willing to sacrifice thousands of dollars of your wealth in order to avoid a $450 fee?

Making a tradeoff like that is called being ‘penny wise and pound foolish.’ Some investors do have the ability to make their own decisions, but the vast majority would be better served to pay a professional for specific advice that’s based on their actual circumstances.

As a Personal Investing Coach I take the necessary time to get to know you – your needs, your goals, your trading habits, your history, your assumptions, your mistakes, and your potential to do much better. I get to the root of what’s causing you stress, anxiety, and frustration. I study your past investing behavior, your decision-making process, and your track record. I analyze the results and come up with a plan to help you change old habits and replace them with new ideas and strategies that get results.

Just like a personal trainer at the gym, I work side-by-side with you to build the skills, strategies, and discipline that will last a lifetime. I build up your confidence and improve your competence, with the ultimate goal of seeing you achieve independence and self-sufficiency. Yes – if I do my job well, you will eventually fire me!

Consider these questions:

- Are you struggling just to break even in the market?
- Have you fully recovered from the 2008 market disaster?
- Are you concerned about running out of money during retirement?
- Do you want to get a grip on your investments, but don’t know where to start?

If you want to explore some steps you can take to deal with these and other issues, request your FREE 30 minute consultation and see how easy it can be for you to take control of your finances.  During this free session, you can ask for more details about how our services work, and you can decide whether coaching is right for you.  The coach will ask specific questions that are designed to measure how much potential for improvement you have, to help you figure out if coaching is right for you.

Here’s a partial list of some of the things we can work on together:

✔ Analyze what’s wrong with your current strategy
✔ Evaluate your current holdings and eliminate the toxic waste
✔ Review your account structure to eliminate gaps
✔ Investment Goal Setting workshops
✔ Create an outline for your new investment plan
✔ Review your current broker/adviser arrangement
✔ Make sure you’re taking full advantage of tax breaks and employer contributions
✔ Look for patterns of repeated mistakes and eliminate them

If you think you might benefit from coaching in these areas of investing, send an inquiry to us at info@zeninvestor.org