The recent sad news for Gunns Limited (ASX: GNS) is an important reminder for every investor to avoid stupid mistakes. Many readers will roll their eyes at this point. That's not exactly a revolutionary statement, after all.
Well, consider this. Former world chess champion Vladimir Kramnik once stated that the game of chess is really about who makes the least mistakes in a game. The Italian soccer team, a four-time World Cup champion, is well known for their defensive play style. If you watch tennis, consider the impact of unforced errors on the results of any match.
To quote superinvestor Charlie Munger, "Warren [Buffett] and I are better at tuning out the standard stupidities. We've left a lot of more talented and diligent people in the dust, just by working hard at eliminating standard error".
Seven deadly sins of investing
There are many such errors, all of them avoidable if you know what to watch for. I like to classify them according to the seven deadly sins:
- Lust: Addiction to short-term price action; using the share price as proxy for value
- Gluttony: Overconcentration in favourite sector/industry; lack of diversification
- Greed: Hunting for short-term profits in price swings
- Sloth: Buying on "tips" with no research; more widely, lack of knowledge and lack of drive to pursue more knowledge
- Wrath: Making decisions in anger, usually because share prices won't behave the way you expect them to
- Envy: Chasing hot stocks in hot sectors that everyone is making heaps of money on
- Pride: You made 1,000% last year, therefore you are a genius, nothing can go wrong, just double down
Process of elimination
Over long periods of time, the share market reflects the steady improvement in human endeavour. Due to competitive forces, some companies will prosper but many will perish. To paraphrase Sherlock Holmes, once you remove the losers, whatever remains, no matter how improbable, must be the winners.
Foolish bottom line
There are over 2,000 listed securities on the ASX alone. The vast majority of them should be on your "DO NOT BUY" list. Shares with lots of debt, such as Fortescue Limited (ASX: FMG) and Slater & Gordon (ASX: SGH) present clear and present dangers. So are shares presently selling promises in various stages of pre-revenue or pre-profits. For those companies you decide to own, keeping your emotions in check and avoiding the 7 deadly sins will go a long way toward increasing your returns.
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Motley Fool contributor Peter Phan does not own any of the shares listed in this article. The Motley Fool's purpose is to help the world invest, better. Take Stock is The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription, whilst it's still available. This article contains general investment advice only (under AFSL 400691).