The repetition compulsion, according to Freud, is psychological behavior in which a person is driven to repeat certain destructive acts over and over. Casual observation suggests that the repetition compulsion is a recurring affliction in the money game.

The latest example arises with reports that General Motors, the poster boy for corporate failure in the Great Recession, is poised to issue new shares. Finding new buyers isn’t likely to be a problem. In fact, the size of the IPO has just been increased by 20%, according to Reuters.
Amazingly, investors who were burned by GM’s collapse during the recession are considering taking a fresh stake in the reorganized car maker. A story in yesterday’s New York Times details that some GM retirees, despite suffering substantial investment losses after the company’s recent implosion, are once again contemplating a new round of stock purchases.
The article quotes a former GM worker who lost enough money in the company’s stock so “that I may not have to pay capital gains tax for about 73 years.” Has that experience convinced him to look elsewhere for financial satisfaction? Not necessarily, he explains, telling the paper that he’s “still on the fence” in weighing a fresh investment in GM.
Pondering a new round of investing in the automaker is, apparently, no isolated event among financial victims of the carmaker’s recent downfall. The Times reports that discussions about investing a second time “is a decision being talked about at retiree clubs, union halls, and G.M. plants and offices across the country as the nation’s biggest automaker prepares to become a public company again.”
For those who share a history with the company, GM is doing all it can to accommodate renewed interest in its shares. Again quoting the Times: “G.M. has set aside 5 percent of the 365 million shares in the offering, which is expected as early as Wednesday, for current and former personnel.” The article goes on to note:

At a meeting of about 500 retired assembly plant workers last month in Lordstown, Ohio, the crowd was divided and very vocal about it, said Bill Bowers, head of the retiree group at United Auto Workers Local 1112.

“There were a lot of sour notes in the audience,” Mr. Bowers said. “A lot of them had put a lot of money into the old stock and ended up with nothing.”

You might think that losing significant amounts of money would be a powerful incentive to avoid the behavior that created the loss, but that’s not necessarily how investors think, or act. But what investors do and what they should do aren’t always one and the same. Diversification is the first law of risk management, and in an age of proliferating ETFs it’s easy and inexpensive to adhere to this rule. And yet…
The inherent logic of diversification is perhaps the most conspicuous and most compelling lesson in money management. The details matter, and they necessarily vary from investor to investor. But its basic efficacy is easily demonstrated. History reminds again and again that those who fail to adequately diversify are subject to hefty losses. Some may avoid that fate, but hope isn’t a strategy. Alas, no matter how many times this point is made, no matter how many studies back up the wisdom of diversification, substantial numbers of individuals feel compelled to put most or all of their financial eggs in one basket.
The compulsion is a recurring disorder. When the energy firm Enron blew up a decade ago, there were numerous reports of employees who had put most of their net worth into the company’s stock, leaving them virtually wiped out when the dust cleared.
The urge to put everything in one bucket isn’t limited to individual companies. After Madoff’s massive Ponzi scheme blew up in December 2008, we learned that several investors had allocated most of their investable wealth with Bernie.
It’s all a reminder that diversification within and across asset classes is essential in a world where uncertainty never takes a holiday. Yes, prudent asset allocation strategies can still suffer big losses, but asset classes don’t go bankrupt. Reversion to the mean helps diversified investors sleep at night. That’s no small advantage for achieving investment success in the long run. Building a solid core investment portfolio that’s largely impervious to the high risk of individual companies, and the machinations of the investment wizard du jour, is critical. Sure, you can embrace a high-risk strategy on the side–just don’t bet the farm on it.
Windham Capital Management boils down the essentials to three “Rules of Prudence for Individual Investors”…
1. Diversify
2. Invest Passively
3. Avoid Taxes (see Rule 2)
Most investors should hold the lion’s share of their investable wealth in a multi-asset class strategy using index mutual funds and/or ETFs. They should also manage the portfolio through time, starting with basic rebalancing to keep risk exposures from going to extremes. Yes, there are other things to do as well, and so sophisticated investors will probably augment a core portfolio with any number of additional strategies and products. But the basic outline for prudent investing is clear, even if the advice too often falls on deaf ears. As Morgan Stanley’s David Darst explains in Mastering the Art of Asset Allocation: Comprehensive Approaches to Managing Risk and Optimizing Returns,

Many investors do not spend enough time thinking about an appropriate asset allocation during various time frames and financial market environments. Instead, they devote excessive attention to industry, sector, and specific investment selection; manager selection; market timing decisions; and other concerns.

Quite true, but this strategic mistake isn’t likely to fade away anytime soon, or so it appears based on the misguided and obsessive focus on GM’s pending IPO among some of the company’s retirees.