I find stock market history fascinating. It’s a sickness. I know many in the financial services industry suffer from the same affliction so this isn’t a shocker.

I shake my head as we seek to match up current market behavior to years past. It’s 1937. No, it’s 1987. Frankly, current markets are comprised of multiple personalities of decades of market history so I find the exercise beneficial.

The study allows me to be less of a deer in the headlines through market cycles and provide clear, concise guidance to clients. It allows me to say confidently – “This time is NOT that different.” Sure, it feels different to you because you haven’t lived through a similar cycle – Investors before you have gone through this. Something like it.

Or worse.

We always seek to find patterns. In everything. It makes us feel smarter. Finding (or creating) patterns creates an illusion of control. I guess when humans were hunting for food, uncovering patterns was the way to find a food source (and avoid becoming a hearty meal). With investing, becoming too overconfident in a perceived trend can lose you money.

What stands out throughout my detective work, is the predictability of our emotional behavior when facing investment decisions. The same mistakes are made, repeatedly.

Did you know that most retail investors lost money during the greatest stock bull market in history? Seriously. How? Oh, by getting in to the markets late in the cycle – only to suffer great losses from the tech bubble in 2000.

Investors commit capital at Euphoria, Thrill, Excitement, even though they claim to seek “value.” Let’s face it – we are addicts to chasing performance. There’s enough household financial carnage to prove the fact. You can’t time market entry/exit perfectly, however many investors bailed out big time at the market bottom in March 2009 – specifically at the Point of Maximum Financial Opportunity.

Smarter investors had the common sense to avoid an “all or none” decision. In other words, they didn’t sell out of stocks completely, they just buffered their portfolios by raising more cash to weather the storm yet they remained invested and took advantage of the market’s cyclical bull now going on five years.

 As I prepare my second book on lessons from Wall Street sages long dead, I came across a first edition of a classic from 1896 titled “Ten Years In Wall Street” by William Worthington Fowler. 

A section “How To Make Money In Stocks” outlines common mistakes of the “Wall Street Operator.” The lessons are worth repeating and stand the test of time. Not surprising we are making the same mistakes over 100 years later! I’ll list them straight from the mouth of the dead along with ways to avoid these mistakes.

1). Time fights on the side of the man who buys stock at a fair price and pays for it, inasmuch as the material interests of our country are steadily advancing. Owning companies at attractive or cheap price levels based on fundamentals and paying cash, not  margin, places greater odds of success on your side. Time. Let’s just say for those who can hold a stock position longer than a week.

Currently, sentiment wins out over valuation. No matter what I examine – a Gordon growth model, CAPE, Q-Ratio: Stocks aren’t cheap.

In the long run, valuations using historical earnings determine returns. However it can take years for these long-term valuation metrics to adjust stock prices accordingly. Be selective at this juncture. Do your homework. There aren’t many bargains out there right now.

2). The man who can keep his position in spite of the temporary condition of prices, is the man who, in the end, wins. I’ll add – If you pay a fundamentally sound price. So, if I paid a good price for the risk taken, the short-term gyration of that price is not going to shake me out of a position. I may even use a dip to purchase additional shares.

For example, I purchased additional shares of Boeing (BA) for several allocations in mid-July when sentiment turned negative which turned out to be good strategy.

3). The frequency of operations is another fruitful cause of losses. Frequent trading for most, is an unsuccessful venture. Brad M. Barber from the University of California, Davis and Terry Odean finance professor out of Berkeley conducted a study of active traders back in 2000 which still proves timeless.

Individual investors who hold common stocks directly pay a tremendous performance penalty for active trading. Of 66,465 households with accounts at a large discount broker during 1991 to 1996, those that traded most earned an annual return of 11.4 percent, while the market returned 17.9 percent. The average household earned an annual return of 16.4 percent, tilted its common stock investment toward high-beta, small, value stocks, and turned over 75 percent of its portfolio annually. Overconfidence can explain high trading levels and the resulting poor performance of individual investors. Our central message is that trading is hazardous to your wealth.

Trading is Hazardous to Your Wealth.

If you’re compelled to trade actively, isolate a small portion of your cash in a separate account designated solely for trading. I have nothing against trading especially if you can use it to gain knowledge about stocks.

You need to do your homework and study technical analysis. One of the best books to read is “Technical Analysis for Dummies,” available on Amazon.

3). The practice of selling stocks short will be found, in the end, to be invariably a losing business. Decent short sellers make headlines. Professionals can hold out longer when they’re on the wrong side of the trade. Most of the population should stay away from this hot mess. You can’t win. I wouldn’t bother with it. Want to protect your portfolio? Increase cash.

4). Cut short your losses and let your profits run. Most investors do the opposite. They’ll hold on to losers “hoping” they’ll come back and sell winners too soon. Keep in mind the dog doesn’t always return home. It’s better to face the fact and move on.

Since we hate losses twice as much as we appreciate gains, I understand the burning desire to get even. It’s a losing strategy. Before you purchase a stock, have a sell discipline in place.

I use negative changes to cash flows, operating margins, a breakdown in the charts to alert me to a possible sell candidate.

Dead sages are great muses.

Old lessons remain good lessons.

They’ve made the mistakes first.

Learn from them.