Unforced errors may be a term most are familiar with – particularly sports fans.
This fan’s all-time unforced error was my New England Patriots and Tom Brady. Marching down the field against the Denver Broncos in an important playoff game with first and goal and the GOAT calls for a pass that is intercepted and returned to the Patriots own 2-yard line (the ensuing pursuit by Ben Watson to nail Champ Bailey didn’t matter to me. What a buzz kill!). Here’s the clip, for those who enjoy reliving this fan’s torture.
We have been students of behavioral finance for quite a while and have been fascinated by what drives investors to make decisions at key market junctures. There is so much in the media to distract investors, both individual and professional, from the most important determiner of stock prices: earnings (with interest rates a distant second).
Domestic policies and geopolitics are top distractors and these always seem to arrive during the in-between periods of earnings reporting season, which makes it a perfect time for making unforced errors. There’s always something in the financial headlines to fuel one’s urge to make a decision, any decision.
Here’s a related excerpt from How Not to Invest, the new book by Barry Ritholtz:
If only there were some ways to prevent investors from interfering with the market’s greatest strength – the incomparable and guaranteed ability to create wealth by compounding over time. Decades as an investor and trader on Wall Street have taught me that panics come and go. Drawdowns, corrections, and crashes are not the problem – your behavior in response to market turmoil is what causes long-term financial harm.
It does not require a monumental blunder to screw up – even modest mistakes can lead to bad outcomes. Here are what we see as some common unforced errors that we consul to be aware of – and avoid.
Unforced Error #1: Feeling compelled to own what fellow country club members own –succumbing to the crowd.
Our partners at NASDAQ Dorsey Wright have for many years run a tongue and cheek post on “The barbecue Indicator.” It’s a good reminder about contrarian thought and the rough translation goes something like this:
Your neighbor recently discovered that you are an investment advisor and organizes a barbecue where you are the guest speaker. Market status: market has topped – go to cash.
The next year, that neighbor has another barbecue and the investment advisor is not invited. Market Status: bull alert – deploy all cash at once.
It’s a humorous anecdote but it highlights the crowd-following tendencies in all of us. Don’t let this human trait compel you to do the wrong thing at the wrong time, like throwing out the baby with the bath water.
Unforced Error #2: Chasing hot names (past performance) or recklessly speculating on penny stocks destined to go to the moon.
From Barry’s book…
Love chatting about stocks at cocktail parties? Excited about FOMC meetings and Non-Farm Payroll releases? Do you hang on every word whenever a famous fund manager shows up on TV? Then you are probably (like me) a dopamine fiend.”
Chock this one to your lizard brain.
It’s not your fault; it’s just how you are built. Our lizard brain – the primitive part of the brainstem responsible for emotions, fear, aggression, pleasure, and the fight-or-flight response – has done a great job keeping us alive as a species.
Unforced Error #3: Fumbling a Windfall – Blowing an inheritance.
When a financial handout comes your way, how do you proceed? What process do you go through to ensure potential life changing wealth endures?
Again, from Ritholtz:
Nobel laureate Paul Samuelson once said, “Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.”
I always suggest focusing on the process of investment decision making. Ask yourself the following question: which of the following would make you feel worse
1) If I have a bearish outlook yet remained fully invested and the market tanked and your money declined by x %
OR
2) If you acted on the bearish outlook and went to 100% cash and the market soared by x %
Which would be a bigger gut punch?
Our view has always been a more measured approach that favors long-term holdings, with technical analysis being the driver of the “when” in our investment decisions. In the financial markets, as in other parts of our busy lives, answers at the forks in the road are rarely black and white, usually they are in shades of gray.
Due to the drawdowns most investors have experienced in recent weeks, now is indeed one of those times to reassess holdings. Some names have shown themselves to be worthy of holding long-term, while other stocks have suffered such technical damage that they should indeed be replaced by names with better technical attributes.
That said, don’t be your own worst enemy. For those rebalancing portfolios now, keep in mind that the pullback we have seen in 2025 is of a size and type investors should expect virtually every year. The long side of the market has been the play over time and will remain so going forward.
Instead of trying to score more wins, consider instead making fewer errors. If investors could get out of their own way and simply make fewer decisions overall, they would make fewer mistakes and would be so much better off.
