Getting Carried Away

One of the greatest developments in the investing world is how easy it is to become an investor. In a matter of literal minutes, you can open an online account, fund it with a few dollars, and instantaneously purchase a share of any publicly traded company.

It’s that easy.

That, however, is not to say it’s easy to be a good investor.

So while anyone with an internet connection and a few dollars can open and operate an investment account, that doesn’t mean they will be successful in their pursuit of investment gains. In fact, that can be far harder than it would seem.

You wouldn’t know that today, though. It’s been quite easy to do well as an investor over the past three-and-a-half years. Especially if you have been invested in technology companies, it probably feels like big gains are a cinch and this investing thing isn’t nearly as difficult as some say.

But as the saying goes, don’t confuse brains with a bull market.

The U.S. stock market is up more than 8% this year. It was up nearly 18% last year, 25% in 2024, and 26% in 2023. You can’t help but make money in that type of market environment.

But as a collective whole, we investors will take things too far. It’s inevitable. It’s human nature.

When your blockhead relative or neighbor is boasting about how much money they have made in the market, you naturally think, “Well, if they can do it, I surely can too.” And when everyone around you is making money, it’s painful if you’re not – or not making as much. After all, you’re one of the smartest people you know.

Just remember, to be a successful investor over a long period of time it doesn’t take genius, it takes discipline.

In fact, exhibiting restraint in times like these may be one of the hardest aspects of investing. When the market seemingly goes in one direction, why would anyone pull back the reins?

Well, we can learn a lot from the actions of an actual genius.

In 1720, Isaac Newton was 77 years old. Not just a brilliant mathematician and inventor, Newton also fancied himself a keen investor. But his brilliance was no match for his emotions. At that time, the stock making headlines – and people insanely rich – was a company called South Sea Company.

Newton was tired of watching everyone around him make money by buying and selling South Sea Company stock. He thought he may as well make a buck himself. And at first, he did. After buying the stock, it quickly doubled in value and Newton sold his stake at profit of 7,000 British pound sterling, which would be nearly $2 million dollars today.

After he sold out, however, the stock continued ripping higher and higher. Newton declared that he could “calculate the motions of the heavenly bodies, but not the madness of the people.”

Eventually, though, the excitement around the South Sea Company proved too much for Newton and he bought back in – with a much bigger position than the first time. Unfortunately for Newton, the sentiment in the market soon changed for the worse. South Sea Company stock crashed in epic fashion, and Newton ended up losing 20,000 pound sterling, or nearly $5 million, when the bubble burst.

A big brain doesn’t protect investors from getting carried away in a bull market.

Warren Buffett has advised investors to be fearful when others are greedy and greedy when others are fearful.

There’s not a lot of fear in the market today. That’s not to say the market can’t continue marching higher from these levels. Anything is possible.

But a little restraint wouldn’t hurt.