To paraphrase P.J. O’Rourke, “Giving assets to a stock market plunger is like giving beer and car keys to teenage boys.” This is a true story. As you read this morality tale, you’ll recognize a person you know or investors you have known or possibly a person in your own mirror.
John was a very successful entrepreneur. Although his distribution company had a very narrow product line, its market segment had been hot for decades and demand had grown exponentially for years.
When John retired, he was a wealthy man with a large cash bank balance and a luxury home owned free and clear. With his newfound free time, he began to focus his energies on the stock market for six hours a day. So here we have a newly minted investor who made his money via a sales strategy that was narrow and deep. Diversification or asset allocation were never part of his lexicon. His entrepreneurial business experience had yielded significant wealth, and he adopted the same tactical approach to the stock market.
John became a stock market plunger. I maintain that a plunger is the polar opposite of a prudent investor. Most prudent investors find that their long term profits come from many different trades across a wide assortment of assets where the larger profits exceed the smaller losses by a consistent margin. A plunger, on the other hand, will make daring emotional investments, risking a large percentage of capital on a single trade. They are so confident in their ‘investment-of-the-month’ that they don’t formulate any sort of exit strategy or use reasonable stops. They seldom ever pyramid into a position by buying a small initial position and then waiting for the market to prove them correct before adding a second follow-on position. Instead, they plunge into the trade by investing 100% of their position all at once.
Since plungers fall in love with their investment, they are irrationally overly optimistic about the upside price targets. When the downtrend begins, sanity exits and they either engage in revenge trading by doubling down to add to their positions or else they totally freeze as panic and denial set in.
John had become a serial plunger. With each trade, he had managed to make a big fortune just a bit smaller. As the patriarch, the family could only sit by and watch as he substituted plunging for knowledge, prejudice for prudence and pure chance for logical probabilities.
John is now in his late ‘80s, the fortune is gone, and he’s just taken out a mortgage on his once-paid for home in order to continue his plunging ways. At this point, the family turned to me for help. I explained to them that they did not need a financial counselor. I know from much firsthand experience that it’s impossible to convert a lifelong plunger into a responsible diversified asset allocation investor.
So I declined to get involved as politely as I knew how, and I explained that what was needed was a triage of psychotherapists and estate attorneys because only aggressive intervention was going to save the house and protect the limited remaining assets. By this time, John was focused on a uranium mine trade that he claimed was definitely going to make everything alright. His serial denials and unrealistic expectations were still going strong.
Aside from the self-evident lessons embedded in this sad morality tale, I submit to all investors that a mentality which embraces diversification and prudent broad asset allocation must be fostered with our kids early on and also during our own earning years. Only then can lucid thinking and balanced judgment be carried over into the retirement years. Parents must teach their kids, but in John’s situation, the kids should have been teaching their parent to adopt a sustainable investment approach. Waiting to deal with an elderly parent who’s already depleted a family fortune before taking aggressive intervention is water under the bridge. As parents, kids and investors, the time to act is now. You do not want to have any part of John’s story as your own.
For precisely these sorts of reasons, my latest investor crusade via seminars and ChartPack updates is directed at highlighting and justifying the importance for individual investors to diligently build a proper personal asset allocation profile.
*“This Cadillac Ad copy actually is based on President Theodore Roosevelt's 1910 speech at the Sorbonne”
Trade well; trade with discipline!
-- Gatis Roze
P.S. Click HERE for information on my future appearances & seminars.
October 17th, 2015- ASSET ALLOCATION WORKSHOP with Gatis Roze & Chip Anderson.
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