I found over time that being a successful investor involves overcoming many challenges. However, these challenges can be conquered if we can avoid some common investment mistakes.
You’ll find many articles with advice on what to do in order to be a successful investor. In this first of two part series, we’re going to look at the other side of the coin- what not to do.
Here are the first four sure-fire strategies for losing money:
Trade quickly and frequently
Warren Buffett’s business partner, Charlie Munger, has often talked about the benefits of taking a ‘do nothing’ approach when it comes to your portfolio. Putting the significant tax advantages of holding stocks for the long term aside, let us first look at brokerage and its impact.
An investor who several times a year, buys and sells all the stocks in their portfolio is going to lose at least a few percentage points. This is true even with internet brokerage rates at a low of 0.3%. Look at our most recent tax return and do the calculations and we’ll see this in action.
Although it is not as quantifiable, there is another important benefit to investing for the long term. We are much more likely to give careful consideration when purchasing stocks that we know we’ll be holding on for the next few years than one we’re going to sell quickly within the week or even day. Taking our time and choosing the right investment for us is always a good strategy.
Of course, if you are dead set on losing money and making your broker rich, then by all means, trade fast and trade often.
Investors can do just as well or even better than short-term traders without the added timing risk and stress.
Let mainstream media be our guide
Despite all of the advice to the contrary, most people still allow media to influence their investing decisions.
The way in which the media influences investors, is best explained by Munger. He talks about people paying more attention to headlines and news stories that are dramatic, evoke an emotional response or are confrontational in nature, than they do to more factual and rational reporting. Thus, media tends to induce fear and panic in investors rather than a balanced approach that would best serve the interests of investors.
You only have to look at the recent Brexit as well as the oil crisis not too long ago. It’s crises after crises.
Incentive-caused bias goes beyond the media. Think about the managing director that starts by convincing himself or herself that a hostile takeover or offshore acquisition is a terrific idea and that everyone, them included, will benefit greatly. Once they are convinced then they convince their board and finally, their shareholders. This type of corporate foolishness is the reason behind generous options packages.
So if our plan is to lose money, then we should close our eyes to the facts and listen to everything we hear, even if the source is someone with a stake in swaying us in a particular direction.
Subscribe to the latest fads
The term ‘social proof’ was coined by Robert Cialdini in his highly recommended book, Influence: The Psychology of Persuasion. Cialdini notes that the propensity for humans and other animals to follow the crowd as there is safety in numbers, greatly contributed to the successful evolution of the species.
‘Social proof’ is not limited to ancient history. It is alive and well today. Think about the dot com boom. Millions of people, not wanting to be the lone straggler in a sea of people flocking towards the technology world just rode the tidal wave wherever it took them. In the investing world, following the latest craze can prove to be very costly. Warren Buffett summed it up when he said, ‘you pay a very high price in the stock market for a cheery consensus.’
This can explain why, when others are fearful and down, we are more excited than when they are optimistic. This also explains why certain stocks are running hot when we are worried about China, nickel stocks and other areas of concern.
So, if we want to see our net worth slip away, we should follow the fads and hot stocks.
Dwell on lost opportunities
Investing, like most things in life, is imperfect. Mistakes are guaranteed to happen, even when we are doing everything right. This has happened to me personally so many times.
In mid-1999, we would have been correct to say that tech stocks were overvalued. Yet, for six months, as prices kept rising, we might have thought otherwise. The point is, there will always be someone out there who amasses wealth faster than we do. That being said, that same person can become poor just as quickly by taking the same approach.
If we make an investing decision and it does not turn out the way we expected, don’t panic. Just as quickly as that opportunity came and went, there will be another one. I tell my readers that investments are just like buses, miss one and another will stop by just as quickly.
Of course, if we want to lose our capital, we can throw up our hands and let fear and panic, rather than calm and rational thought guide us.
Next week, in part two, we’ll explore even more ways most people get trapped into losing money in this game. Talk about motivation huh?
