Another important reason that the average investor typically underperforms market indexes is that he seems continually drawn to popular investing concepts. If there’s a mortal sin in investing, then following the crowd is it. After all, investor confidence is a coincident indicator—that is, confidence tends to be high when investments are (already) highly priced, and it tends to be low when investments are low-priced. Indeed, many investors have a habit of following one popular investment concept with another, typically just in time to buy high and sell low.
While patience is good, it makes little sense to continue to hold an investment once its fortunes have permanently changed for the worse—that’s stubbornness. How is an investor to know when holding an investment amounts to patience or stubbornness? Chances are that the average investor will focus on the prices of his investments and make his investment decisions on that basis—rather than focus on the health of or outlook for the companies of which he’s a part owner. This, dear clients, is a disastrous approach to investing. (It’s also a major reason why the average investor performs so poorly.) Simply put, watching daily prices won’t tell you what you need to know. Nevertheless, when there’s little else that the average investor knows about his investments, prices are often what he looks to.