The Curse of the Individual Investor

Yesterday a top technical analyst with B of A Merrill Lynch predicted a 20% S&P 500 decline in the coming weeks/months. Also yesterday, B of A Merrill Lynch's U.S. Equity Specialist raised his S&P 500 12 month target to 1450 - that's a 24% increase from here... This morning B of A ML's Senior Global Equity Analyst explained that their technical analyst is expressing a very short-term view of the market, but as a committee they agree that stocks will be higher 12 months out...

Here's the thing folks, Merrill Lynch, with all its impressively-credentialed analysts, is making an academic guess... My observation (after 27 years of observing) is that none of them (ML, etc.) are any good at prognosticating... I do however make note of their logic... The 12 month 1450 target is based on valuations... Meaning when you consider the price of an average share of stock compared to the company's earnings (now and projected), you get a valuation lower than we've seen since the early 80s... And make no mistake, opportunities like this only present themselves in the midst of horrendously bad news... That's how it works... Stocks are the one thing nobody wants when they're on sale...

As an advisor I'm ultimately concerned with my clients' perspective... There are those who decry their August account statement, thinking "stocks-will-take-forever-to-come-back", who have completely lost sight of the market's (the Dow) move from March of '09 (up 90+% at the 12,700 peak) in a mere two years... Then there are those who are raiding their junk drawers to scrape up whatever cash they can to buy more... Five years out, who do you think has it right?

My concern is with both extremes... Those with the this'll-never-get-better attitude suffer the curse of the typical investor - the follow-the-crowd mentality which virtually assures a buying high and selling low result... Those with the this-is-the-opportunity-of-a-lifetime mentality risk allocating more of their portfolio to stocks than their time horizon warrants...

Of course a big part of my job is to help my clients buy the right sectors, etc., but most importantly I effort to keep them from making portfolio killing mistakes...

Read the following hundred-year-old quote from Charles Merrill (speaking of Merrill Lynch)... With great eloquence he described why individuals, left to their own devices, tend to fare poorly in the market:

Excerpt from my upcoming book:

The curse of the individual investor is his propensity for whatever