I’m about 11 months late for my 2017 Investing Do’s and Don’ts, so let’s just assume the following rules apply for this year and the next.
Now, as you know, it’s easier to appear smart by being negative or cynical (just ask my uncle), so let’s cover the investing don’ts first.
- Don’t take financial advice from the back of a Cornflakes packet, Twitter, a stock forum or from your brother-in-law. Similar to Barnaby Joyce’s seat in parliament, it’s probably against the law and you’ll never be comfortable holding the share when times get tough.
- Get trustworthy and licensed financial advice before buying Commonwealth Bank of Australia (ASX: CBA) shares or any other investment. The licensing part is easy: if they do not have an AFSL, or AFS Licence, the advice you’re receiving is illegal in Australia. Unfortunately, as my mother would say, “it’s harder to find people you can trust than you can love”. Finance is no different. Make sure the adviser’s interests are aligned with yours because even a licensed charlatan can sweep you off your feet with some crazy theory or promises of reward.
- Think twice before day trading or charting, buying gold, shares without positive free cash flow, and Bitcoin. The blockchain is here to stay, in my opinion, but the same cannot be said of Bitcoin.
- Be careful of intellectual naysayers. In Australia, we have Tall Poppy Syndrome. The cultural and gravitational pull of our tribal wiring tells us that there is safety in numbers. When someone sticks their head above water — especially in finance — other ‘intellectual naysayers’ are quick to shoot down the stars and appear smart. For example, I know of one Australian investment guru who has built a 20-year career from being negative but yet does not have a public investing track record of his own.
You can spot these people from a mile away because they often say things that…
- Agree with your belief system or preconceptions. However, the populist vote in investing is more often than not an express ticket to the poor house. For example, if I say Woolworths Limited (ASX: WOW) shares are expensive and you agree, has our conversation added any rigour to the debate? If you want to be average, just agree with everyone else. But, if you want to be better-than-average, you need a variant perception.
You are the average of your five closest friends, family or colleagues. But remember, you need people who are willing to disagree with you. Social media and the “follow” button have made this behavioural miscalculation more difficult to correct. Acknowledging it is the first step.
- Assume the good times will go on. Aussie property has had a pretty good run. 20 years of gains, they say. The banks tell us investors are ahead on repayments. And interest costs are low. Yeah, nah.
It’s not just property whose cycle rhymes with steep and deep. Humans have a tendency to anchor our perceptions of what has — and what will — happen, to the present time. Assuming the good times will continue because they are good right now is a massive risk to your wealth. However, it’s impossible to know when something will change. And it’s nearly as risky to not be invested in the share market, so all you can do is be prepared emotionally and financially.
In the next article, I’ll cover the Investing Do’s.
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