My No.1 investing mistake to avoid

Recently I wrote two articles on “two egregious investing mistakes to avoid” made by speculators with minimal understanding of how share markets work, and ‘four common investing mistakes” to avoid for more sophisticated retail investors looking to generate better returns.

Finally, I’ll cover off a common investing mistake that can potentially be the costliest of all.

A while ago I had it pointed out on Twitter that avoiding shares on the basis you’ve ‘missed the boat’ can lead to you permanently excluding yourself from the best returning companies.

There’s also been many academic studies that show how the best-performing companies on the U.S. market contribute a disproportionately high amount of an index’s total returns over the long term.

While on the one hand this is daunting as it’s not always easy to identify these companies, on the other hand there’s the point that if you own these companies you are highly likely to beat the market.

On the local share market there are a number of tech companies commonly labelled as ‘sells’ or ‘too expensive’ by business commentators or professional fund managers.

In fact in an article I contributed to (alongside a number of professional investors) for the Herald Sun on a couple of stocks to buy and avoid in 2019, two of the five fund managers named Altium Limited (ASX: ALU), WiseTech Global Ltd (ASX: WTC) and Xero Limited (ASX: XRO) as their stocks to avoid in 2019.

This surprised me as they look three of the best long-term growth prospects on the local market and all have thumped the market’s returns in 2019 and recent years.

Often you’ll find that shares most commonly nominated as ‘overvalued’ in the media are the best performing and those nominating them understand little about their attractive economics and what’s driving the share price gains.

Just look at Amazon and Netflix in the U.S. for example, with Netflix up over 31,000% since its 2002 IPO despite being regularly labelled as ‘overvalued’.

Over the long term strong top line growth at the expense of rising sales and marketing costs is likely to trump profit growth as a result of cost cutting. If a company cannot grow its top line I’d forget it as companies growing their top lines consistently at decent rates are almost always the best performers over the long term.

Take the healthcare space where Cochlear Ltd (ASX: COH), CSL Limited (ASX: CSL), and ResMed Inc. (ASX: RMD) have second-to-none track records of revenue growth, but are regularly labelled as ‘too expensive’ despite delivering investors the best returns.

There’s nothing much to stop a high-quality company growing indefinitely, therefore thinking you’ve missed the boat on fast-rising companies near 52-week highs is likely to be the most expensive investing mistake you’ll ever make.

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Motley Fool contributor Tom Richardson owns shares of Amazon, Altium, Cochlear Ltd., CSL Ltd., ResMed Inc., and Xero.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Altium, WiseTech Global, and Xero. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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