Left to their own devices, investors apt to struggle, in good times and bad. Most investors are their own worst enemies. They get caught up in counter-productive behavior and weird mindsets that serve, in good times and bad, to decrease their long-term returns.

And the key to their dysfunction is a four-word mantra: "It's different this time." Ten years ago, for example, people -- and not just people, experts -- were saying things were "different" because new technologies (the Internet, etc.) had so altered the relationship between consumers and suppliers that historically outlandish price-to-earnings ratios were A-OK. More recently, things were "different" because the real-estate market had become a magical engine allowing land and buildings to increase in value, unchecked and forever.

Common errors

"Of course, it's always just different enough to mislead investors and convince them that fundamentals no longer apply," says Jon Hirtle, CEO of Hirtle Callaghan. "They always apply."

Here's a checklist of destructive things investors do, according to Hirtle.

Confusing investing with trading or speculating "Investing is entirely about acquiring future cash flows at the most attractive rate. Everything else is noise. Investors should regard time-tested truths, about price-to-cash flow and regression to a mean, the way engineers regard Newton's Laws. Although every investment scenario is different, the true fundamentals are irrefutable."

Projecting recent trends "Just as the past performance of an investment is not a certain predictor of future returns, recent trends will not necessarily continue and investors should resist the temptation to buy more of what worked (or continue avoiding what didn't work) last year."

Ascribing cause to random events "Investors often conjure up trends and profound meaning from completely random events. Ascribing cause to random events encourages investors to gaze enviously backwards at those who benefited from the random event, then work vigorously to position themselves to benefit from the next random event, which is impossible, by definition."

Making decisions based on rules-of-thumb "The most commonly used rules-of-thumb are the ones that incorporate oil prices, interest rates, dollar projections, and earnings estimates. These 'econometric models' have demonstrated no consistent information value to investors, yet they continue to be used. Without a significant 'coefficient of information,' econometric models are no better than any other rule of thumb."

Relating economic news to stock market performance "Economic data lags while equity markets anticipate. There is no meaningful relationship between a particular year's economic performance and the same year's stock market performance. The stock market can rise while we are the middle of a recession."

West Conshohocken, Pa.-based Hirtle Callaghan pioneered the concept of the outsourced chief investment officer in the late 1980s. It supervises more than $16 billion for high-net-worth and institutional clients. -FWR

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