I have spent 35 years in finance, ie investment banking and money management. I have seen several manias, booms and busts in financial markets, a lot of irrational human behaviour.
An extensive market memory is what I regard as my biggest professional asset. So many mistakes in investing have I witnessed – both on my side and others – that now I feel somehow in a position to judge them objectively from a neutral point of view, although I am still prone to make them.
As the great masterpiece by Hyronimus Bosch depicts the Seven Deadly Sins (above), there are a few fundamental mistakes in investing that can absolutely ruin performance.
Most people believe investment success is all about picking the winners. In my experience is it equally if not more important to avoid the deadly sins of investing.
If you don’t get caught in those traps I can assure you investment performance will take care of itself.
1 Information Overflow
In today’s online multimedia world we are overwhelmed by a tsunami of information flow. Financial information is at our fingertip 24/7.
People tend to believe that with more information they have a better basis to make investment decisions. This is flawed, as just the perceived knowledge increases.
Instead, this information flow contains so much “noise” (ie useless information) that on the contrary it makes it even more difficult to filter the essential bits based on which to make sound investment decisions.
Tip
Watch the sources of information: get serious and reliable information from papers, research, etc. Cancel all the “noise”. Focus on the essentials.
2 Lack of Investment Goals
The first and probably most important question one should ask before making investment decisions is: what are my investment goals?
These goals very much dependent on the financial situation of the individual: most importantly of the age and if she / he is in a financial accumulation (ie savings) or wealth decumulation (ie spending) phase.
Tip
Clearly define your investment goals:
what is your investment time horizon?
what is your risk tolerance (fluctuation of prices of investments)?
how much of a drawdown (= interim losses) are you prepared to take?
3 Lack of Analysis
People very often take lots of time and efforts to make not so important “investment” decisions (such as washing machines, TVs). They seldom take appropriate resources for life defining financial decisions.
Investing is all about analysis, or “due diligence”. There is no shortcut to conduct your own research. Try to find your niche, everybody has one area where they have an “edge” of knowledge (think about your profession).
Key things to check when to invest in a stock are competitive advantage, product superiority, management quality, and of course stock valuation.
Tip
Find an area where You have expertise. Focus in your analysis on the five key parameters that drive the performance of an investment.
4 Overtrading
The 17th century mathematician Blaise Pascal once said: “All human evil comes from a single cause, man’s inability to sit still in a room.”
As is inherent in human nature, people always want action. So they do with investments. They believe the more they trade, the better.
Quite the opposite is true: overtrading, apart from being costly, almost certainly leads to bad investment decisions and hence performance results.
Tip
Resist the temptation to always have to act. Sit still, be selective and very carefully consider each investment You commit to. As Warren Buffett used to say: regard your whole investment life as if you had a punchcard with only 20 investment choices.
5 Impatience
Time and again people ask me if I had a sure “Tip” for an investment to make a quick buck. Besides that there are no “sure Tips”, a lot of people are plagued with a chronic desease when it comes to investing: impatience.
I like to compare investing with sports: investing is not a sprint, it is a marathon. Some of my friends built quite some wealth with real estate and their own companies. I always remind them that it took years to create value with real estate or building companies. The same is true for stock investments.
Tip
Set yourself an absolute miminum investment horizon for one year for an individual investment. Also, do not check the prices too frequently. Because the underlying value does not change as fast as prices.
6 Flow with the Crowd
There is this old stockmarket saying that “the trend is your friend”. Surely this is true for some periods.
However, outstanding investment results can only be achieved when you take the opposite view of the prevailing opinion of the crowd.
Think about all those mania peaks in the stockmarket, from 1929 to 2000, 2007 and probably 2021. Your bet against the “wisdom” of the crowd has to be extremely well founded especially avoiding sins number 1 and 3.
Tip
Be a “Black Swan” – ie take the opposite investment position of the crowd – when you are absolutely convinced that the market is excessively irrational due to mad crowd behaviour.
7 Bad Risk Management
Last but not least, no or bad risk management can be detrimental to your investments.
It is essential that you carefully monitor your investments, not so much in price terms, but regarding the development of the underlying fundamental value.
I am not a big fan of overdiversification. Not putting all of your eggs into one basket is fine, but do not open too many baskets, rather watch your eggs closely.
Tip
Key ingredients for good risk management are: monitoring of investments, cut your losses and let your profits run. And change your mind immediately when the facts change.
