Look back over the performance of your stocks in 2014. What were the successful stocks? Which ones were the duds? Which caused a meltdown in your share returns?
Apart from the uncontrollable factors of stocks rising and falling, are we pretty much to blame for poor performance as well?
Last year, Warren Buffett talked to USA Today newspaper and the media about the 3 biggest mistakes that average investors make that threaten long-term wealth creation. Are you doing some of these right now? Have they been robbing you of returns?
- Trying to imitate high-frequency traders
You hear it every day. This stock flew 3% in a day. That stock plummeted 5% yesterday. If you are going to play in the market on such a short timescale, expect trouble. Most high-frequency traders don't make big money. They're always playing catch-up on their losses. Buffett says you should buy stocks like you're buying an apartment or a small business, not lottery tickets.
- Trying to time the market
No one knows when the market, any market, is at a bottom or a top until well afterwards. Even Buffett with all his financial wisdom and success said: "The only value of stock forecasters is to make fortune-tellers look good." Focus on the companies and their performance. Take advantage of the market when it's overly depressed and pick up bargains.
- Paying too much in fees and expenses
These are the silent robbers of future wealth because you don't even realise the total cost of fees over time until it's too late. If you are using an investment manager, keep the fees as low as possible. Better yet, pick up index funds that have very low management fees. If you do your own investing directly, then think of your commission fees. Also, trading too much will raise your taxable income on any profits if you buy and sell a stock in less than twelve months. You miss out on capital gains tax deductions due to short-term trading.
What then is Buffett's solution to all of this?
He said you always want to look at the productive capability over time of the asset you're buying.
Here are two stocks that could fit that description of high productive quality.
— REA Group Limited (ASX: REA), the operator of the widely successful realestate.com.au property search website, has been a consistently high earnings growth stock for a number of years. It's expected to continue this trend over the next few years as it expands into the huge US real estate advertising market.
— TPG Telecom Ltd (ASX: TPM) is a growing telecommunications company that has extensive network infrastructure assets it can use to make itself a wholesale and retail service provider of high-speed broadband in competition with the national broadband network. This will give it competitive advantages for lower operating costs and make its service offerings more exclusive. Analysts are looking for double-digit earnings growth in the next two years.
