Legendary investors like Ray Dalio or Warren Buffett often openly discuss their investing habits and strategies in public forums. It always strikes me how easy these gurus make successful investing sound, when in fact it is one of the hardest skills to effectively master. This is because many behaviours that build the foundations of successful investing do not come naturally to us as humans – one being delayed gratification, for example.
Not only do we have to conquer our worst impulses, but we have to do it permanently over the life of our investing careers. Here are some common mistakes that many investors make that may be harmful to the future of your investing returns.
Buying high, selling low
This is the worst mistake to make, but all too common. Everyone knows that 'buy low, sell high' is the best way to make profits from stocks, but human nature tends to kicks in when we see big price movements in either direction. Fear of missing out (FOMO) encourages us to jump on the bandwagon of rising prices, 'before it's too late'. This kind of euphoria is what fuelled the BitCoin boom in 2017 and we see it all the time with growth stocks like Afterpay Touch Group Ltd (ASX: APT). Likewise, 'getting out before stocks fall further' is a common reaction when there are sell-offs. The reality is that it's a fool's game to try and time entries and exits – time in the market beats timing the market almost every time.
Not knowing what you're buying
Often, we are tempted by the latest 'hot stock' and we buy in based on vague ideas of 'growth areas' and 'tailwinds', without actually understanding what a company does or how it makes money (or doesn't make money). Just because a company has a new 'revolutionary payments platform' or is a tech start-up with a 'cloud-based, end-to-end solution' doesn't mean it's the next Amazon.
Assuming the market is rational
Although we are told by many people that 'the market is rational', there are countless examples of the market being completely irrational. Legendary investor Benjamin Graham once said that "in the short-term, the stock market is a voting machine, but in the long-term it is a weighing machine".
This basically means that the stock market can be a popularity contest at times and that actual fundamentals can take time for investors to appreciate. A key to successful investing is getting in (and out) before the crowds do. This is known as being 'contrarian' and involves differentiating between price movements based on emotion and movements based on value.
Foolish takeaway
Being an investor is difficult because we all feel the urge sometimes to do some (or all) of the above investing sins. Making things worse, as we get these urges, we will probably see others acting them out. This can cause a justification bias and lead us to do things that will ultimately cost us. A major part of successful investing is simply about conquering our worse enemy – ourselves.
