Zbigniew Piekarski suggests why fools are parted from their money

You know my preoccupation with "natural laws". These laws apply to every market, and every individual investor should mind them closely. We are dealing with an "open" system, one that reacts with its environment, so these laws are ones that demonstrate very high degrees of probability, but never certainty.
The first and the most basic law is "sell in May and go away".
Don't believe me? Well, will you believe an American stock market historian and analyst by the name of Yale Hirsch, who is an editor and publisher of the "Stock Trader's Almanac", now in its 33rd year?
After an exhaustive analysis of stock market behaviour and cycles in differing political and economic environments, Hirsch identified two distinct seasons in any stock market. The months from around November to April are the most productive. Those from around May to October tend to be destructive.
If you are aware of this law and use it to your own advantage, the increased returns, over and above the normal holding pattern, can be substantial.
What has that got to do with the WSE? Why, everything! The chart below illustrates the WIG Index.

This law has held good in eight of the past 11 years, and two of the exceptions can be explained away as the euphoria of a newly "emerging market".
This year the "worst of times" was triggered in mid-April, and now the "best of times" is also two weeks early. However, beware of the current bear market rally. It is a self-fulfilling prophesy and will end in tears with substantial losses.
The second law concerns the "irrational emotionalism" of the typical investor.
Conventional wisdom holds that investors make rational decisions based on all the information available at the time. This is what the theorists in the hallowed halls of academe and the regulators of markets consider a self-evident truth.
Those at the sharp end, the brokers and the investment advisers, know the truth is the opposite of conventional wisdom, that investors are totally irrational, buying at the peak of the market when greed and euphoria are rampant and then selling at the bottom in fear and panic.

The flight into bond funds is a prime example. Investors are bedazzled by past performance figures and fool themselves into believing that bond funds are a safe harbour and that their returns will continue indefinitely.
Don't believe me? Well, will you believe this year's co-winner of the Nobel Prize in Economic Sciences, Daniel Kahneman of Princeton University, who received the award "for integrated insights from psychological research into economic science, especially human judgment and decision-making under uncertainty". I quote: "Human decision-making deviates in one way or another from the standard assumptions of the rationalistic paradigm in economics. If such deviations from rationality and self-interest were small and purely idiosyncratic, they would on average cancel out, and economic theory would not be too wide off the mark when predicting outcomes for large aggregates of agents. If deviations from rationality and self-interest were systematic, however, this would call for a revision of economic theory itself."
His conclusions - investors resist rational decisions, and the primal instinct of fear is far stronger than that of greed.

Once again, watch out for emotional extremes in the market as they indicate desperation. After the recent huge rises the market will correct, and this time when lower lows are established, wait for the panic.
The third law is the one outlined by Warren Buffett: "Wide diversification is only required when investors do not understand what they are doing."
Buffett is the richest man in the United States with a personal fortune of about $36 billion, and perhaps the world's most successful investor. One share in his investment company is worth $70,910. Had you invested $10,000 with him in 1965, it would now be worth $50 million. So he is to be respected and listened to.
The most often repeated advice and the one that many investors seem happy to hear is "diversify your portfolio". That seems easy, and it sure sounds good. The trouble is it is recycled nonsense.
"Diversification" is and always has been at best a guarantee of mediocrity and at worse protection of the incompetent.
The diversification lesson usually includes "spreading your risk" across "asset size" - never mind that small-cap, mid-cap and blue chips all declined in the bear market. And what of bonds and property? They, too, have cycles.

Spare a thought for the embattled Polish investor. Not content learning that the WSE can go down as well as up, he now has had the opportunity to lose even more money and at a faster rate in funds investing outside the country. The seven funds that have a 12-month track record have managed to lose between -15% to -45% within a year. So much for "diversification".
Do not become a "jack of all trades and a master of none". Concentrate on a limited number of investments, but know them intimately. So why does the diversification mantra remain widely compelling?
Warren E. Buffet offers an answer: "As a group, lemmings have a rotten image, but no individual lemming has ever received bad press."