BlueFire Strategies LLC

The Dangers of “Do-It-Yourself” Investing

The hardest part of being a do-it-yourself (DIY) investor is managing and controlling your own emotions — and perhaps more important, adjusting your behavior when volatility is rolling your boat everywhere. Especially in this day and age with 24/7/365 news and media alerts. How to tune out the noise and discriminate between relevancy and not? It’s hard to stay disciplined and stick to a plan with drill sergeants shouting in your ears. Moreover, all that shouting leads to herd behavior because it’s hard to resist the current. Even knowing it’s herd behavior isn’t enough to arm you to resist its momentum.

When the market falls, it’s natural to feel distressed and disappointed. It also motivates you to chase returns and “take a flyer” to attempt to make up for losses. In other words, market corrections inspire speculation and risk taking — if of course, you don’t sell everything and get out of the market entirely, for good.

The Overconfidence Trap

Additionally, overconfidence hides your blind spots. I’ve seen many investors who had great returns during a bull market mistake those results as their skill. Then when markets turned, their expectations bubble was widely busted. I’ve seen CFOs of mid-sized technology companies during the internet mania, harvesting great returns, crumble. Investing was an easy game during 1997–1999, then their portfolios halved in size during the following internet bubble. They were even heavily invested in companies similar to their own, but the weather changed.

Overconfidence is a beginner’s trait, and success when the weather is great breeds it.

But a full season is necessary to experience for the intelligent farmer. Spring rains alone aren’t sufficient to gauge and measure your results by — one requires investing experience across long economic cycles, ideally during bull markets, strong corrections and bad economic conditions. Are your results “skill” or “luck”? Can you distinguish?

Two Common Mistakes

The two most common mistakes DIY investors make involve chasing performance and too much trading. Studies have shown, for example, that women tend to be better long-term investors than men, because they’re more risk averse generally and don’t trade as much. Patience is the better reward in investing, and men tend to be more overconfident and less patient. Hence, they trade more and bear more costs, which eats into compounding returns.

Mistake One

Chasing Performance

Fed by media reports of “some company’s month-to-date return of 20%+” — fear of missing out grabs hold, and you jump in just in time for the next volatility down-cycle.

Mistake Two

Too Much Trading

Selling is so easy today it takes less effort than buying a $25 item online. Fast doesn’t aid focused thinking on pros vs. cons — slow is the better process for investing.

Past performance alone is not a good metric to invest by. It’s often caused by not knowing enough about financials, so you fall back on what you understand. We all do this, of course — we lean on what we know and ignore what we don’t. Not a recipe for sustained success.

The First Rule of Investing

The first rule of investing is: don’t lose any money. Obvious, but forgotten most of the time — often because we don’t have enough time, or don’t make enough time, to devote to the effort of investing. One contributor to losses is just that trading is so easy these days. You can sell $100,000 of one stock and buy another easier than buying a $25 item online, because of the time it takes to type in your credit card. Amazon Prime makes it easier and faster, but with faster comes fewer hurdles to jump before making a mistake — fewer checks and balances on your thought process, more spontaneous buying. So how much time can you spend on investing?

Stopping Power: A Military Analogy

We’ve all heard the phrase “don’t put all your eggs in one basket.” Let me give an interesting analogy.

Example: The Search for Stopping Power

The U.S. military found in the Philippine–American War of 1899–1902 that U.S. troops armed with a small-caliber .38 revolver didn’t have enough stopping power to fell a charging enemy. Hence the search for a handgun successor, which led to the development of the .45 semi-auto with a heavier bullet, allowing for greater “stopping power.” The .45 was adopted and became the “go-to” handgun for the U.S. military for the next 70 years.

However, it became obvious that the heavier bullet took longer to aim and slowed the number of bullets going downrange compared to lighter, smaller bullets, due to recoil. Also, a larger bullet meant fewer in the magazine. Hence a replacement for the .45 became the next goal, where throwing bullets downrange — and more of them — became an imperative.

1899–1902

.38

Insufficient stopping power against a charging enemy

Adopted After

.45

Heavier bullet, greater stopping power, go-to sidearm for 70 years

1985

9mm

Lighter, faster, more rounds carried — faster sight picture, less recoil

By 1985, the 9mm Beretta M9 was adopted. The bullets were lighter (still heavier than a .38), faster, and the pistol carried more. The M9 allowed a faster sight picture to get on target due to less recoil, and two 9mm bullets were worth more than one .45 landing on a target in the same amount of time.

What This Means for Investing

Imagine the weight of a bullet as the weight of a stock. Owning 5 stocks vs. owning 30 has a difference for the same $100,000 investment portfolio. The latter has a better chance of lower volatility, lower firm-specific risk and smoother returns — basically, more stocks downrange. Diversification matters.

The Trade-Off

Owning 30 stocks means spending more time overall, as your decision-making on whom to own goes up. But it’s far less risky than owning a concentrated portfolio — it will just take more time to manage due to the positioning. Can you spend the time?

The BlueFire Approach

We at BlueFire have a process for investing that employs a systematic, research-driven approach which takes the emotion out of investing. The security selection is based on financial fundamentals, and the portfolio construction methodology assures a broad portfolio spread across all economic sectors; in addition, the weight of each stock is designed so that all stocks have matching risks.

True diversification across economic sectors
Smoother returns and improved risk-adjusted performance
Low firm-specific risk
Resilience across different economic regimes over time
Liquidity, with no lock-up period
Comparable returns to passive index strategies over the long term

There are no guarantees that our strategy will be successful, but we believe it offers the opportunity for better outcomes over time than most competing strategies.

Take the Emotion Out of Investing

A systematic, research-driven process designed for true diversification and smoother returns — so you don’t have to fight your own psychology to stay disciplined.

DISCLAIMER: This is not a solicitation for investing nor is past performance any forecast of future performance. This is for education and information only. Investments by their very nature are risky and all investors should consult with professional advisors or counsel before making investments. All charts and numbers in this communication are estimated variables, not constant and the author has taken their published numbers as they are from outside sources with no further research as to their authenticity. Nothing has been audited. Read and interpret at your own risk. Interested investors must be at least accredited and need to read documents provided by our Fund administrator based on invitation from BlueFire Strategies LLC.

Investments involve risk and, unless otherwise stated, are not guaranteed. Information provided is for educational purposes only. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.