Back during my schooling years, I studied the same problem again and again so as not to make the same mistake come exam time.
Problem was, I was horrible at application.
If the exact question came out in the exam, I killed it.
But that rarely happened. The question was always worded differently and confused the heck out of me.
I screwed up similar questions time after time simply because I couldn’t adapt what I had studied to the current version of the question.
Isn’t the market like this?
You make investment mistakes and in order to make sure you get it right next time, you focus and tell yourself you won’t make the same mistake again.
But how often does the market offer the exact same situation?
Something is always slightly different. Before you know it, oops, your tendencies start to come out….. again.
I’ve written about this before, and seeing as how I’m the least perfect investor, allow me to share some of my common investing mistakes.
It’s time to confess.
My Common Investing Mistakes You Should Avoid
1. Trying to Time the Market
We are all affected by what the market does to a certain degree.
The biggest problem is that with the market zooming up, uncertainty about when to buy creeps in.
- Should I buy now?
- The markets are volatile so I will wait for a better entry.
- The market is overvalued so I should wait until the market corrects itself.
The Fix: Focus on the investment quality of the business and buy it at a cheap or fair price independent of what the market does.
The best companies rarely give you the opportunity to get in at a good price. If you can figure out the future earnings power and the valuation looks good down the road, good investments only look cheap in hindsight.
2. Focusing on the Stock Price and Not Intrinsic Value
There are two parts to this common investment mistake.
If the intrinsic value of a stock is 50% or even 100% higher, then waiting for the stock to drop a measly 2% before buying doesn’t make sense.
I have found myself quibbling over wanting to buy it “just a little cheaper”.
How many times have you found yourself submitting a buy order and entering the bid price just a few cents lower than the stock price?
Stop quibbling over cents. That’s a lesson taken from Phil Fisher.
The second point is that the stock prices do not dictate intrinsic value. Let’s say AAPL’s stock price drops 10%. Headlines will crow over how the company lost $90B of it’s value.
One of my biggest business lessons has been that despite what the market does, a company like AAPL will continue to churn profit regardless of what the market does.
The general stock market is a secondary market. The company is not selling their securities directly to you. If this was the case, volatility and price movements would practically be eliminated as Apple would have a clear price they would sell the shares for.
If the stock drops 20%, it’s easy to get worried, but the best thing to do is to do nothing.
Well, maybe take a walk and come back.
3. Holding a Loser Until it Breaks Even
I hate this mistake.
I fall for this one more often than I should but it’s getting better.
A dreaded bias of not wanting to close the position on a stock at a loss that I invested a lot of time and effort on.
I wrote an update on GRVY recently. GRVY was a net net and had the makings of a huge profitable investment.
Like all things in life, it didn’t turn out the way I had planned. At first, the holding was hugely profitable, but I found myself looking at a -50% loss.
I kept holding despite deteriorating fundamentals and one failure after another. I sold most of it for a loss, but kept “hoping” that things will improve.
Yes. You could smell desperation.
4 years later, it’s up 500% and I get the occasional email from people saying what a genius I was… haha.
The afterword of this brief GRVY reminder is that I’ve been in many situations where I really hoped that things will improve. But seeing how this happened one too many times, it became clear that I was the problem, not the investment.
GRVY is now up 500% since then. They got lucky and righted the ship and it’s really taken off. Either way, GRVY is a lucky situation. There have been other companies that ended up going to zero.
Painful lessons that I have not repeated since. If I’m wrong, I cut my losses and focus my energy on making a better investment and my returns have thanked me for it.
4. Overly Focusing on Other People’s Opinion
There are pros and cons to this.
The pros are:
- it’s a shortcut to investing especially when you’ve found somebody you can trust
- saves time
- build a diversified (> 20 positions) based on other solid value investor picks and it beats the market
The cons are:
- you don’t know what you are getting yourself into
- you don’t know exactly when to sell
- you don’t know what to do if something bad happens and you need to keep asking for opinions
It’s truly a big mistake when you end up completely relying on another person on the investment.
As a blogger, I get emails from people asking me what I think of a particular investment.
My response? If you need my opinion, you should move onto something else.
Becoming overly dependent on someone else is a mistake which is a huge portfolio risk.
Human nature though. It’s easiest to be given a fish instead of learning how to fish.
5. Not Utilizing My Checklist Enough
I do have a checklist that I refer to. I purposefully don’t make it into a gigantic list as that itself leads to other behavioral issues.
But by using just one set of checklist, I end up looking for the same style of companies. My checklist needs to expand and evolve into something that can handle different types of investments.
A collection of shorter checklists is needed that is suited for different situations such as:
- common value plays
- high growth stocks
- and net nets
Not only will this help make better decisions, but it will also reduce time during the research phase.
You need to have clear goals of what you want to know instead of wandering and figuring out what you should be looking for.
Am I the Only One to Make These 5 Mistakes?
I wish I can say that I only make 5 mistakes. But the list goes on and on.
At the same time, I’ve been able to avoid deadly mistakes by learning from the mistakes of others.
If I had one last thing to add as I wrap things up, it is that getting complacent and indifferent about mistakes is as bad as it gets. But if you’re a normal person, you’ll read all this and chalk it up as a good “tip” or “lesson”. We humans have an uncanny ability to forget the bad stuff.
The funny thing is that many people will go to the ends of the world to get back $10 if they feel they got ripped off. You’ll get mad about it and do what it takes to get it back.
Or you’ll spend 5 hours analyzing which washing machine to buy.
But losing $10,000 in the stock market is totally OK.
I just hate losing money in the stock market, as much as I do in day to day life. Maybe the best cure is to get mad when you lose money in the stock market and do what it takes to get it back.
What do you think?