Dodge these investment devils

As you might suspect, many investors are their own worst enemies.

But an ally can be found in Phil Holt, a registered investment adviser

in Fairfax, Va., who runs Holt Portfolio Services and counts many feds among

his clients. Holt has a straightforward take on three common problems — or as he likes to call them, the Three Devils.

Devil No. 1

Holt says the first devil is the math of investing. A loss of 50 percent

in a stock requires a gain of 100 percent to get even — a nasty reality

that is often overlooked by investors who chase big profits while disregarding

risk. A loss of 10 percent requires a gain of 11.1 percent to get even — a more reasonable proposition.

The math of investing is counterintuitive — - like probability math when

we think that a coin landing heads three times must have a better chance

to land tails on the fourth toss. Not so. The laws of chance say that the

chance for another coin landing heads is 50 percent. Holt believes that

the investor who does not understand the math of investing does not really

grasp the risk he or she is incurring. And he believes the math of investing

makes a compelling case for stock diversification.

Devil No. 2

The second devil is what Holt refers to as "random reinforcement." When

an investor hits the jackpot with a big winner in the stock market, he asks,

what caused me to win? His answer may be, "I won because I bought a stock

selling for less than $10." Or, "I won because I bought a computer stock."

Or, "I bought in June." The investor may fail to distinguish between results

obtained by chance and those generated by real stock market inefficiencies.

As a result, the investor may make a host of unprofitable future decisions

based on faulty reasoning. Holt says successful investors identify effective

techniques and processes and employ them with discipline.

The ultimate reinforcement in the stock market — random or not — is

profits. That is why stocks are sometimes bid up to ridiculous levels having

no relationship to underlying value. The lure of profits induces investors

to take a chance that their stock will keep going up. Investors often react

emotionally, rather than objectively, to developments within their portfolio.

Successful investors make decisions for reasons that are proven to provide

a profitable edge, according to Holt.

Devil No. 3

The third devil is paralysis by analysis. Investing requires the same

management process that leads to success in other endeavors. Investors need

to plan, organize, implement and control. If they don't, then their money

either sits in a savings account earning a low rate of return, or, at the

other extreme, is invested carelessly on the first investment idea that

comes along. Holt says investors should not be overwhelmed by the abundance

of information and approaches to investing. Instead, they should proceed

as they would with their other endeavors — - plan, organize, implement and

control.

The three devils can cause disappointment and even heartache for investors.

Investing ultimately is a human affair, subject to human foible. Knowing

the devils that may confront you should help to keep you on a profitable

path.

Holt can be reached at HoltPort@aol.com.

Zall, Bureaucratus columnist and a retired federal employee, is a freelance

writer based in Silver Spring, Md. He specializes in taxes, investing, business

and government workplace issues. He is a certified internal auditor and

a registered investment adviser. He can be reached at miltzall@starpower.net.

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