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What Makes Great Investors Tick? By Stephen J. Butler

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When asked to describe Bill Gates for a recent New Yorker magazine article, Warren Buffet had a simple explanation for people like Gates: "They're wired in such a way that when they see business questions or problems or activities they tend to get the picture very quickly. They don't get tangled up in prejudices or biases they may have. They just tend to get the right answers. It's sort of like 'Why was Ted Williams a great hitter? It's about seventy-five percent DNA."

Yet another theory has it that Bill Gates, because of some mannerisms he displays, may be slightly autistic which gives him a powerful facility for digesting numbers. Anyone who recalls Dustin Hoffman in the movie "Rain Man" and his character's success in Las Vegas can understand why this theory may hold water.

For whatever reasons we want to choose, we can all agree that Bill Gates is a pretty smart guy, but sheer brain power doesn't necessarily translate into effective investment decisions. Ernest Hemingway once said, "Some intellectuals are the dumbest people I know."

After the stock markets of the last five years, it is hard to look dumb if we were in the market at all, but an old saying on Wall Street goes, "we can never confuse brains with a bull market."

When we stop to review our investment results, this is a time to pretend we're Bill Gates -- to break free of those Hobgoblins parading around in the left-hand side of our brains. Let's take a cold, factual look at 1999 and carefully process information that should bear some weight in our investment decision-making for 2000.

How badly do we feel about having endured a roller coast ride over the past two years? Whenever we have missed out on whatever stocks or funds rose substantially, it will definitely help us feel better if we look at funds or stocks that had spectacular results for a few early years of the 90's only to crater a few years later.

This year, of all recent years, it will be especially difficult for any of us susceptible to the "herding instinct" to resist diverting our assets into some of the recent better-performing funds. Probably most 401(k) plans have at least one fund that has dramatically outperformed the others. According to the great book "Why Smart People Make Big Money Mistakes," the warning signs of a major herding problem are as follows:

You make investment decisions frequently
You invest in "hot" stocks or other popular investments
You sell investments because they are out of favor, not because your opinion of them has changed.
You're likely to buy when stock prices are rising and sell when they are falling
You make spending and investment decisions based solely on the opinions of friends, colleagues and financial advisors.
Your spending decisions are heavily influenced by which products, restaurants, or vacation spots are "in."

It may be helpful to know that the odds are very good that we all suffer from a severe case of herding syndrome. Surveys of 401(k) participants ask the question, "What was the most important source of information influencing your choice of investment mix?" By far the most popular answer (for 80%) was "I asked my friends what they did." Give me a break. Or, as our mothers used to say, "Just because little Johnnie jumps off a cliff doesn't mean that you have to do it, too." These surveys of 401(k) participants illustrate one of the purest expressions of herding. Herding is the dark side of the force, and it explains Morningstar's statistic that the average mutual fund investor has earned only 3% per year over the past fifteen years while the average mutual fund has earned over 15%.

As we say to our therapists, "We don't want to go there." There's no reason for us to be led around by the herding instinct. Let's just rebalance our accounts, or leave them alone for another year, and let our basic mix, like a sensible pair of shoes, do its work. Rather than fretting over investment changes, we should try to save more money. If that's where we spend our energy, we'll wind up with a more comfortable retirement…and probably the last laugh.

BUYandHOLD does not offer or provide any investment advice or opinion regarding the nature, potential, value, suitability or profitability of any particular security, portfolio of securities, transaction or investment strategy. Any investment decisions you make will be based solely on your evaluation of your financial circumstances, investment objectives, risk tolerance, and liquidity needs. The securities mentioned above are being used for illustrative purposes only and should not be regarded as an offer to sell or as a solicitation of an offer to buy and past performance is no guarantee of future results.