To paraphrase the philosopher George Santayana, those who don’t learn from stock market’s past are condemned to repeat it.
With that in mind, let’s look at some lessons investors learned – or at least should have learned – in 2012. Many of these lessons are timeless, yet investors don’t always heed them.
1) Following the herd can get you trampled
When Apple was trading for more than $700 back in September, the media were filled with breathless stories about folks waiting in line for the iPhone 5 and analysts boosting their price targets to $800, $900 and – in a couple of cases – $1,000 or more. Then came the Apple Maps fiasco and the ouster of the company’s top software and retail execs, which – together with growing competition from Samsung and Microsoft – sent the stock down more than 25 per cent. When everyone agrees that a stock is going higher, it often means risks are being ignored.
2) Beware of stocks bearing high yields
The next time you’re tempted by a stock’s outsized dividend yield, ask yourself why the payout is so high. Yellow Media is the poster child for why investors need to be skeptical of high yields and in 2012 investors learned that lesson again with stocks such as TransAlta and AGF Management.
3) IPOs can be deliver a KO to your portfolio
Facebook. Zynga. Groupon. ‘Nuff said.
4) Be cautious with commodities
Care to guess how many of the 10 worst performers on the S&P/TSX composite index in 2012 are commodities companies? Answer: 10. Six miners of gold and other metals, three oil and gas producers and one energy services company. Resource producers face myriad challenges: They have no control over the price of commodities; they face ever-rising labour and production costs; and (when they have operations in other countries) they can be at the mercy of foreign governments that don’t always play nice.
5) Safety comes with a price
With five-year GICs yielding less than 2.5 per cent and 10-year Government of Canada bonds yielding less than 2 per cent, fixed-income investors are barely keeping up with inflation. Parking a portion of your money in government bonds and GICs is fine, but investors who refuse to take on any risk will likely pay a steep price in the long run by missing out on the potentially higher returns of stocks.
READERS: Is there an investing lesson that we missed? What did 2012 teach you? Share your thoughts in the comments section.