- Investment Mistakes: Learning from Other Physicians
- Habit 1: Get In on That Hot New Deal
- Habit 2: Combine Your Morals and Your Money
- Habit 3: Buy What’s Fashionable
- Habit 4: Reach for Yield
- Habit 5: Use Exotic Products to Enhance Your Returns
- Habit 6: Trade Frequently
- Habit 7: Use a “System”
Investment mistakes are a part of financial life. We all make mistakes. The key is making mistakes on a small scale when the loss isn’t catastrophic. We then should learn from the mistake and not make it again. Many of us repeat mistakes many times before learning how to avoid it.
Investment Mistakes: Learning from Other Physicians
The best approach would be to learn from the mistakes of others. That is my favorite way of learning. That is partly why I read so many investment books. I see what didn’t work for others and try my best to avoid making the same investment mistake.
Spencer Jakab in his book, Heads I Win, Tails I Win, provided examples of common investment mistakes. Here I will highlight some of his ideas from chapter ten. Think of this list as a “7 Habits of Highly Unsuccessful Investors.“
Habit 1: Get In on That Hot New Deal
There seems to be a cycle with hot new technology businesses. There is a slew of startups all growing wildly and making money. Then they crash down. Only to create a new cycle from the ashes.
Have you heard about an IPO that is destined to make a killing? Maybe yes, maybe no. IPO investing is speculating at best, gambling at worst. For most of us, it is not true investing. Stay away.
Habit 2: Combine Your Morals and Your Money
The California state employee retirement fund, CalPERS lost billions after it decided to invest based on their assessment of human rights standards. Other individuals have suboptimal portfolios based on trying to select “good” companies and avoid “bad” ones.
With multinational companies or country funds, it is nearly impossible to sort out “good” from “bad.” Trying to do so cuts you out of a growth segment. Such tampering increases costs and leads to suboptimal returns. It is better to make your fortune and then give it away selectively and responsibly to causes you believe in.
Habit 3: Buy What’s Fashionable
Fashionable companies are the ones that are currently popular. Much like the popular kids in high school. Some of those go on to be wildly successful, but many don’t live up to early expectations. Fashionable stocks tend to be linked to fads.
They are growth stocks selling at high prices compared to earnings (high P/E ratio). They have the opposite characteristics of value stocks that have served successful investors so well (e.g. Ben Graham, Warren Buffett, Joel Greenblatt).
Stocks that are out of favor are snatched up by contrarian investors and tend to outperform the market. The reversion to the mean is working in their favor instead of against them.
Habit 4: Reach for Yield
With reduced dividend payouts and low-interest rates, finding yield is difficult. What if you are an older, conservative investor. What if you want a substantial income coming in. You want your investments to look like a paycheck.
Maybe you like the analogy of the goose that lays the golden egg. Your investment is the goose. A dividend check or interest payment is the golden egg. You want the egg, but don’t want to touch the source.
This compelling logic and a strong desire for income will make you susceptible to all kinds of scams, costs, and hidden risks. It is all too easy for financial services companies to set up an income producing fund that will pay you your desired return.
In your need for yield, you may ignore the underlying volatility. You may also ignore the declining capital balances over time since you are blinded by your generous healthy cash flow.
Remember, “high-yield” bonds are also called “junk bonds” for a reason.
Remember also, unlisted REITs are unlisted for a reason. Stay away.
Habit 5: Use Exotic Products to Enhance Your Returns
Leveraged ETFs have the power to incinerate your wealth at high speeds.
As do hedge funds, options, currency trading, commodities, and derivatives. Leave it to the “professionals” who mostly make their money based on bonuses, commissions, trading fees, etc.
Habit 6: Trade Frequently
Don’t just do something, stand there. Good investing is boring investing. Your overall wealth is inversely correlated to your trading. The more you trade the more you are susceptible to emotional trades and the less you will be a rational profit maximizer.
Also, the more you trade the more fees you pay (commissions, bid-ask spreads, etc.) and the higher your taxes (if in a taxable account).
Watching the transactions in your investment account should be about as exciting as watching paint dry. Get your excitement elsewhere.
Habit 7: Use a “System”
Late night infomercials rarely produce worthy content. That is certainly the case when they push a “sure-fire” stock trading system.” Typically, they imply results are double-digit and virtually guaranteed – if only you pay them for their books, course, and DVD to teach you how.
Digging deep into previously advertised systems leads to a list of lawsuits, failures, prison sentences, fines, and bankruptcies.
If it seems too good to be true, it surely is. If someone had a foolproof way of making huge money profits with no risk, do you think they would be wasting their time on TV ads to sell to you?
Heck no, they would be enjoying their private jet on the way to their island. Anybody sharing secrets has secrets not worth sharing.
Investment mistakes increase when you make investing more complex than it needs to be. Building wealth can be simple. Understand the basics, create a simple plan, and avoid these common investment mistakes.