We're all prone to making mistakes when it comes to investing. In fact, investing great Peter Lynch once said "In this business, if you're good, you're right six times out of ten. You're never going to be right nine times out of ten."
But some mistakes are more avoidable than others. Here are three common pitfalls that investors make, and how to avoid them.
Anchoring
One of the biggest — and most common — mistakes made by investors is 'anchoring' their thoughts or decisions to a reference point. Commonly, they make this mistake with share prices.
As an example, let's say you bought shares of Bapcor Ltd (ASX: BAP) (formerly 'Burson Group') shortly after its initial public offering (IPO) for $2.00 per share. Within about two months the shares were already trading 15% higher at $2.30, which was likely enough to convince some early investors that the easy gains had already been made.
It's just as likely that many investors decided to take their gains when, for instance, the share price hit $4 in December 2015. Investors who made that mistake – assuming all they could make was 100% – will be kicking themselves today! Indeed, the share price has since risen to more than $5, and even traded as high as $6.56!
That provides us with a good lead in to the second mistake often made by investors…
Topping up on Losers
Let your winners run and run.
Even some of the more experienced investors I know often make the point of topping up on shares that they own that are 'in the red'. Many justify this by saying that, by purchasing more, they're reducing their average purchase price and that it will pay off in handsome profits when it rebounds. But what if it doesn't rebound?
There's nothing to say that a company's shares have to recover. Indeed, no matter what price you buy them at, they can still lose 100%!
Often, the best thing you can do is top up on your winners instead. To be clear, that doesn't mean buying more of overhyped shares as they climb higher and higher. But if the business is performing strongly, and remains good value, let your winners run!
Turning back to Bapcor for a moment, it's clear that investors who bought more along the way would have been well rewarded for doing so. Bapcor isn't alone: Technology One Limited (ASX: TNE) has gone from strength to strength over the years, along with other huge winners like Corporate Travel Management Ltd (ASX: CTD). Had you bought shares in each of those companies five years ago, and topped up again and again on the way, you'd be laughing all the way to the bank by now.
Water your flowers. Pull your weeds.
Mistaking the Trees for the Forest
There is almost always value to be found in the market, even if the market itself isn't all that cheap. Don't make the mistake of chasing the latest fad or focusing solely on the top end of the market. Broaden your investment horizon and look where others aren't necessarily looking.
