“Confirmation bias” is a troublesome thing that most people aren’t even aware of. And if they are, they often still can’t guard against it.
The concept is simple: we like to think we’re smart people who make good decisions, and therefore we want to believe all our choices are the correct ones. Even when they are obviously not.
This attitude infects more than just the stock market — from partisan politics to our favorite football teams. When a conclusion clashes with our desired narrative, we simply overlook the evidence or wave it away as an outlier.
Unfortunately, while we can debate the long-term impact of trickle-down economics or whether Eli Manning is an elite quarterback or an epic disappointment, the stock market isn’t quite so forgiving.
At the end of the day, investors have only one arbiter of truth: their portfolio balance.
As such, I make it a point each December to look back through my last year’s picks and uncover what I got right… and more importantly, what I got terribly wrong.
Thus, in the interest of learning from my mistakes, I’ve dug up the dumbest ideas I wrote about this year on MarketWatch and tried to figure out how I got things so terribly wrong.
If you want to commiserate (or simply point and laugh), here they are:
A bad, bad call on U.S. stocks
For a long time, I was a happy member in the chorus of bulls who insisted valuations weren’t a problem and the market had more room to run. But for some reason, I got cold feet last December.
In a column a year ago with predictions for 2017, I wrote that “the market has already priced in a business-friendly environment in Washington” and that stocks “won’t budge” in 2017. I also said value investing will come back into focus as growth stalls, and that already priced-in corporate tax cuts wouldn’t be delivered as many planned.
I couldn’t have been more wrong on all this, and it has been to my detriment in a big way. All told, y personal investing portfolio up less than 8% this year compared with a 19.4% gains for the S&P 500 SPX, -0.52%
Sure, I saw some gains this year. But the opportunity missed was enormous.
I chalk the mistake up largely to my reluctance to take what the market was giving me, and overthinking things instead. After all, Wall Street is largely a very efficient market — and while the cliché “be fearful when others are greedy” is occasionally true, sometimes everyone is greedy for very good reason.
A worse call on health care
It’s bad enough to miss out on broad market trends. But on top of that, some more tactical bets I made turned out to be pretty terrible as well.
Back after the Obamacare repeal collapsed in summer, I sounded the all-clear on health care and told investors to dive in to the sector. But not only did the sector underperform the broader market since my column at the end of July, but the specific picks I highlighted did even worse.
Regeneron Pharmaceuticals Inc. REGN, -1.79% has declined about 20% since my call was published, and Teva Pharmaceutical Industries Ltd TEVA, -0.26% is down over 40%.
The dreaded concept of confirmation bias was behind much of this failed trade, since health care has been very good to me in the past and I presumed it would be so again. But similarly, I find many of my trades that depend on long-term megatrends often overlook very real short-term headwinds. That was clearly the case here as investors found much better places to put their money in 2017.
The worse call was on consumer stocks
It’s bad to miss the broad rally, and worse to get overweight health care when the sector underperforms.
But it’s downright unforgivable to see the no-brainer resurgence of consumer spending coming… and then get too cute to actually make money off it.
That’s exactly what happened with my retail and consumer calls that I made roughly a year ago, right after Trump’s election and record consumer confidence numbers started to roll out.
Rather than play this trend directly via the broad market or even via a targeted fund like the Consumer Discretionary SPDR ETF XLY, -0.58% I instead was too clever by half and made some overly aggressive picks. The idea was that these struggling companies would come roaring back, and make tremendous gains thanks to spending tailwinds.
The trend was for real, but my picks weren’t. The names mostly lagged the S&P 500, with the worst dog being struggling toy maker Mattel Inc. MAT, +0.26% which is down more than 40%.
This is perhaps most representative of my fundamental flaw as an investor: an opportunity that seems obvious gets the better of me because I look for the BEST way to play it, instead of simply riding the wave and settling for good performance instead of overnight riches.
Some silver linings
Of course, some calls were right. So on balance, the year wasn’t a complete loss. Some of my better predictions for 2017 included:
Emerging markets: At the end of last year, I wrote a column with the headline that “Your best investment bets for 2017 are in emerging markets.” Then in February, I doubled down by writing one headlined “Why now may be the time to buy China stocks.” Admittedly, I expected less out of the United States... however, it’s undeniable that the rest of the world has done even better. A direct investment in China via the popular SPDR S&P China ETF GXC, +0.00% would have won you 45% gains this year, while a broader play like the iShares MSCI Emerging Markets Index ETF EEM, +0.47% would have racked up 31%.
Europe: Looking to Europe also was in part predicated on a struggling U.S., but turned out to be a path to outperformance. I pointed across the Atlantic in February, highlighting the Vanguard FTSE Europe ETF VGK, +0.05% and since then the fund has outperformed the S&P 500 nicely.
Tech 2.0: I highlighted some tactical tech ETFs that have simply exploded this year. These include the Global X Robotics & Artificial Intelligence ETF BOTZ, -0.63% and the Emerging Markets Internet & Ecommerce ETF EMQQ, -0.13% both of which have soared over 50% this year.
Rates: I said interest rates wouldn’t budge in 2017 despite central bank actions. And while we saw some action in 2017, the yield on the 10-year T-note TMUBMUSD10Y, +0.00% not fat from where it was at the end of 2016.
Sell Dick’s: I made plenty of sell calls that may have technically been “right” insofar as the stock in question underperformed in an up market. But this warning on Dicks Sporting Goods DKS, -1.30% a year ago was perfectly timed. After a big run in 2016, shares have roughly been cut in half despite a roaring stock market.
Buy Amazon: Sure, it’s uncreative and everyone knows Amazon.com AMZN, -1.40% is a powerhouse. But still, advising people to buy Amazon in the spring and again in the summer of 2017 was undeniably a money-maker. And I’ll take my wins where I can this year.
Here’s hoping 2018 has more calls like these, and less of the losers.
Now read: Howard Gold on why I was wrong on U.S. stocks in 2017