In uncertain times, it might be reassuring to rely on well-known investment and trading sayings. However, what about the ones that may steer you in the wrong direction?
Mistakes, Sometimes, they come down to individual decisions. Often, they are as simple as financial advice gone wrong.
Here are some common blunders that investors may encounter.
Mistake 1: “Enthusiasm is necessary for great accomplishments in stock market”
Enthusiasm is very catching, sometimes, that is the key to success. Actually, evidently it is not only the tyro who needs to be warned that while enthusiasm may be necessary for great accomplishments elsewhere, on Wall Street it almost invariably leads to disaster.
An alternative view: In Wall Street, much of damage could have been (and was!) avoided by investors who learned and lived by being patient and disciplined. The really dreadful losses always occur after “the buyer forgot to ask ‘How much?’ ” Most painfully of all, by losing their self-control just when they needed it the most.
This was that leading common stocks could be bought at any time and at any price, with the assurance not only of ultimate profit but also that any intervening loss would soon be recouped by a renewed advance of the market to new high levels. That was too good to be true. As a matter of fact, no matter how careful you are, the price of your investments will go down from time to time. While no one can eliminate that risk, what we should do is to learn how to manage it—and under control. You must also be able to harness your emotions and think for yourself.
In short, if you’ve failed at investing so far, it’s not because you’re stupid. It’s because, like Sir Isaac Newton, who is one of the most intelligent people, you haven’t developed the emotional discipline that successful investing requires.
Mistake 2: “Obvious prospects for physical growth in a business do not translate into obvious profits for investors”
It has long been the prevalent view that the art of successful investment lies first in the choice of those industries that are most likely to grow in the future and then in identifying the most promising companies in these industries. For example, smart investors—or their smart advisers—would long ago have recognized the great growth possibilities of the computer industry as a whole and of International Business Machines in particular. And similarly, for a number of other growth industries and growth companies. But, this is not as easy as it always looks in retrospect.
Such an investor may for example be a buyer of air-transport stocks because he believes their future is even more brilliant than the trend the market already reflects. For this class of investor the value of our view will lie more in its warnings against the pitfalls lurking in this favorite investment approach than in any positive technique that will help him along his path.
An alternative view: The pitfalls have proved particularly dangerous in the industry we mentioned. It was, of course, easy to forecast that the volume of air traffic would grow spectacularly over the years. Because of this factor their shares became a favorite choice of the investment funds. But despite the expansion of revenues—at a pace even greater than in the computer industry—a combination of technological problems and overexpansion of capacity made for fluctuating and even disastrous profit figures.
Mistake 3: “Let’s sell for now and wait for the dust to settle.”
The equivalent for cash-rich investors would be “Let’s keep the cash and wait for the dust to settle”. The S&P500 has rebounded by more than 60% since its low on March 23, 2020 and most investors that have not bought are still in waiting mode.
An alternative view: Instead of waiting, it is much better to build a solid exposure structured around well-defined investment themes, such as the US market and China. Potential winning infrastructure sectors might include IT & Communications, Healthcare, and Industrials. Other attractive opportunities may also be found within the Consumer Discretionary and Consumer Staples spaces.
Mistake 4: “The market is wrong.”
No, it is not. It is us as individuals who are wrong. The fault, dear investor, is not in our stars—and not in our stocks—but in ourselves...
At any point in time, the market simply discounts all public information available (the fundamentals) as well as investors’ psychology (momentum).
An alternative view: Never fight a trend. Most of the time, we understand several weeks/months later why the today’s market trades at current levels. It is better to listen to what the market has to say to us and only when a trend changes should we adjust accordingly. The current secular bull market started in May 2013. On average, this period lasts 16-18 years.
Mistake 5: “This time is different.”
No, it is never different. We may feel this way because we are living an unprecedented experience due to the pandemic, but the context is always different. In 2000, it was all about sky-rocketing valuations. In 2008 the financial system (not the market system) was falling apart.
An alternative view: What never changes is our behavior or our reaction, which is always based on greed and fear. Today it is fear that guides our feelings and this bodes well for the continuation of the bull market. Always remember: bull markets end with euphoria, not fear.
Mistake 6: “I cannot sell this stock at such a loss. Let’s keep it for a while and see what happens.”
Avoiding a loss (and keeping zombie stocks) is one of the worst strategies ever, in my opinion. Normally, “what happens next” is absolutely nothing as these stocks go nowhere.
An unrealized loss is still a loss. The best way to quickly recover from previous losses is to make sure that what we own now will outperform in the future.
An alternative view: Covid-19 is changing the world. It clearly defines winners and losers, so be quick at selling the losers. Don’t keep the cash but reinvest into structural winners that benefit from the acceleration triggered by Covid-19.
A market shock is challenging. Don’t make it worse by following these common misconceptions.