The mistakes investors make
An investor is someone who takes risks with their capital with a view to reward. At a time when the eyes of a man with significant sums in cash for the last five years are as empty and lifeless as a boarded up cinema in a town called Misery, taking risks with their money might be new to some readers. In this article, I aim to point out a few of the mistakes/pitfalls to avoid. I stress that doing so is not always easy – a little like avoiding potholes in the dark – so the following could perhaps be seen as my attempt at providing headlights!
Panic: the most natural reaction to bad news. However, selling at the worst news is often selling at the lowest (or very near) point. Once markets have got to panic stations, it is usually a good time to buy, for the longer term investor. A good maxim to go by is to be greedy when others are fearful...
Hindsight vs. foresight: Sir Winston Churchill said that “if we don’t learn from history we don’t learn anything”, and our regulators remind us daily that past performance is no guide to the future. However, balance is key. When we drive, we use the windscreen a lot more than the rear-view mirror, but both are essential to a safe journey. That’s probably the balance to aim for: look ahead more, and learn from what is behind us.
Anchoring: a very specific term which, for investors, refers to the tendency to use facts or events that are known to them, even if not relevant to what they are dealing with. An example would be that we made money by following a particular fund manager for 18 months, then sold, at a profit. When asked five years later what we know of him, we say he is great – despite not knowing what he has done in the intervening years.
Trying to catch a falling knife: essentially trying to buy (typically an equity) at the bottom. This is almost impossible to do, especially if the price has downward momentum. The 'knife' can continue falling, bounce or rebound, or in fact never recover.
Following the herd: I like to describe investing with the herd, effectively doing so without due consideration, as like a Cyclops running down Herd Street whilst a Unicorn gallops down Blind Alley: i.e. an accident waiting to happen!
Not monitoring risk – it changes!: depending on what we mean by risk, making sure we understand it is surely vital. I have met plenty of people who describe themselves as “cautious” only to find they own very high-risk investments for one simple reason: they don’t (and didn’t ever) understand the risks.
By Simon Gibson, Director