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Money Moves Gone Wrong: Why Smart People Make Bad Investment Choices

Money Moves Gone Wrong: Why Smart People Make Bad Investment Choices

May 02, 2024

Between 1986 and 2001, an investment study was conducted by journalist Eleanor Laise that evaluated the performance of the Mensa investment club vs. the S&P 500. If you are unfamiliar with Mensa, it is an organization founded in 1946 that allows membership for those with an IQ within the top 2% of the population. After her study, Laise realized her results were extraordinary. Throughout the fifteen years of the study, the S&P 500 index provided an annualized return of 15.3%. Conversely, Mensa generated a measly 2.5%, underperforming the market by an astounding 84%.

One of the greatest true stories ever told of money moves gone wrong is that of Jesse Livermore. Livermore was a brilliant stock trader and has long been considered the pioneer of “day trading.” He was born into poverty in 1877 and began working at age 14 to help the family put food on the table. His first job was as a board boy posting stock quotes at a Boston branch of the PaineWebber brokerage house.

He had a talent for trading and was innately smart. He studied stocks, recording their movements in ledgers and searching for patterns in their fluctuations. Livermore was a speculator. Speculating in the stock market is essentially high-stakes gambling, and the house wins more often than not. Day traders are notorious for losing money. CNBC published a report that found that 97% of all individuals who persisted (in day trading) for more than 300 days lost money.

Over the years, Livermore lost everything due to bad financial decisions multiple times, only to make it back. In 1929, Jesse Livermore had somehow recognized a market bubble and built a short position that the stock market would decrease in value. Nobody knows if he realized how much the bubble would burst. The stock market crashed, and overnight, he made over 1 billion dollars in today’s money, around ($100,000 million then). Within five years, he would lose this fortune due to a combination of overconfident trading and new regulations enacted by the Securities and Exchange Commission (SEC). By 1940, he was bankrupt.


Here are 5 investing tips smart people can consider to address potential costly mistakes:


First and foremost, never forget, that any kind of investing is risky, and there is the true possibility that you could experience a turbulent market and have your investments wiped out.


1.      Understand risk and your risk tolerance

Only invest money you can comfortably afford to lose without impacting your lifestyle or savings strategy. Smart people may feel they can beat the market, and the risk doesn’t apply to them. They might understand the veritable ratios poured over by brokerage house analysts and complex trading graphs. They can rattle off ticker numbers and the ins and outs of trading underlying securities and see themselves one bet away from becoming the next Warren Buffett. They are used to winning. However, the desire to generate fast, passive income through investing is often so strong that people only see what might happen if they are right and not the reality of what usually happens when their investment doesn’t pan out as anticipated. And that is their downfall.


2.      Adopt a long-term investing approach

One aspect of investing that makes it so difficult is the inability of people to predict how the market will fluctuate; therefore, buying and selling with the hopes of generating a quick profit is often futile. However, taking a long-term approach through buying into an investment and holding for decades has proven more beneficial. This approach does not guarantee that you will make a profit and not lose everything, but the chances of your investment performing better than a short-term approach are historically more accurate.


3.      Create a strategy that works for you and stick with it

Everybody has a different investing approach. Determine and stick with which strategy works for you and your financial goals. One of the problems Elenor Laise noticed was that smart people tended to be somewhat inconsistent and even impatient and bounced from strategy to strategy, never allowing any technique to work and grow with time. Time, consistency, and patience are the not-so-secret ingredients to potentially growing wealth in the stock market.


4.      Diversification

Have a diversified investment portfolio. This means investing money not only in stocks and bonds but also in ETFs, mutual or index funds, CDs, high-yield savings accounts, treasury bills, real estate, and even alternative investment instruments like art or other collectibles. Having a diversified portfolio can help mitigate some of the risk of market volatility.


5.      Consult a financial professional

Due to the risk involved with investing and its emotional impact on people, especially when the market becomes volatile, consulting a financial professional is highly encouraged. A third party without emotional ties to the money in play or the decisions can help you address some of the unexpected fluctuations while also helping to manage your investments so you don't make rash decisions that might harm your financial strategy.



The Complete Trader – Jesse Livermore (

Smart People Can Make Stupid Investing Decisions (

Alpha Beta Core on LinkedIn: Being a genius may not help! Mensa is an organization founded in 1946…

Jesse L. Livermore: Education, Stock Trading, Nickname (


Important Disclosures:

Content in this material is for educational and general information only and not intended to provide specific advice or recommendations for any individual.


No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.


There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.


S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

This article was prepared by LPL Marketing Solutions


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