Quotes about Human Nature

"Human nature being what it is, there is a natural cycle to our emotions about the markets. We tend to go from terror during a major decline to disbelief through much of the subsequent advance—and then to a sense of ‘I’ve missed it, and I have to run to catch up—gotta jump on what’s hot!’ as the bull market continues. Again, this cycle of emotions is very human—but it’s a formula for very bad long-term investment outcomes.

First of all, remember that you can act your way to investment success, but you can’t react your way. If you react to falling markets by fleeing them, and then belatedly lunge at whatever’s fashionable in an attempt to catch up, you’ve actually found two ways to get hurt. We’ve talked a lot over the last couple of years about the mistake of panic; now may be the time to talk about the mistake of chasing immediate past performance.

Second only to panicking out of the markets, there may be no more sure way of getting substandard investment outcomes than by overinvesting in whatever has been red hot in the last block of time—and then, when that sector inevitably goes cold, chasing some newer vogue. Warren Buffett famously said that the investor of today does not profit from yesterday’s growth, and performance-chasing is the most painful way of demonstrating that truth to yourself. You are almost always trying to buy a track record that someone else already got, and that turns out not to be replicable.

I continue to believe that the most reliable approach is to diversify across several equity sectors and styles—large company and small company, growth and value, domestic and international—in roughly equal amounts, and then rebalance your portfolio back to its original allocations once a year around the same time. To me, this is the tortoise approach to long-term equity investing. And although we will surely see a red-hot hare go whizzing past us from time to time, as we continue to plod along we’ll sooner than later find that hare gasping in exhaustion at the side of the road—and we’ll pass him.

Broad diversification with annual rebalancing remains the best equity strategy I know to pursue your long-term financial goals. It is the antidote to panic in falling markets. But more to the point today, it is the antidote to the siren song of the one red-hot sector that is going to make up for all lost time."

--Nick Murray