3 Investing Mistakes That Will Destroy Your Portfolio
Investing is as much a science as an art. Intelligence does have a role to play. But it is psychology that separates the great from the average investor. You might be the smartest person in the world, but if you lack the psyche, all that intelligence counts for nothing.
To become a high-performing investor, we need to confront some internal beliefs. Beliefs that are holding us back from achieving investing excellence.
Mistake #1: The stock price is too high, it’s going to come down.
Many stock data providers show the 52-week highs and 52-week lows of companies. Investors have the notion that if a stock is at a 52-week high, it can’t go any higher.
When I first started investing, I had this same thought. I viewed stocks at 52-week highs as risky. Instead, I would look for stocks at 52-week lows for stocks that were “undervalued”. More often than not, there is a reason why these stocks are selling at 52 weeks low. It’s likely that the fundamentals of the company have deteriorated. The business is no longer as good as it once was.
Let’s take an example of Amazon. Amazon’s stock price have hit multiple 52-week highs, on its way to a whopping 177,690% return since its IPO. It listed at a price of $1.73 per share, it’s now over $3,000 per share.
Winners keep winning. The increase in the stock price is justified by the company’s business growth.
Don’t look at companies hitting 52-week lows. Focus your research on companies consistently hitting 52-week highs.
Mistake #2: This $1 stock is cheaper than that $2,000 stock!
Have you heard of people who say “I rather buy this $1 stock because it is cheaper than the other one that costs $2,000 per share. This way, I can buy more shares.”
To quote Warren Buffett’s famous statement:
Price is what you pay, value is what you get.
Let’s use bread as an example. If I told you that the bread that cost $1 is mouldy and past its expiry date but the $5 bread is baked to perfection using the highest quality ingredients. Would you still choose to buy the bread that cost $1, just because of an arbitrary price that makes it look “cheaper”?
Many people tend to focus too much of their attention on the stock price. But guess what? Stock price tells you NOTHING about how much a company is worth. You’re wasting your time monitoring stock prices. I’d rather you use the time to watch netflix and chill.
Mistake #3: When the price hits $xxx, I will sell.
Perhaps you’re holding onto a losing position. You’re refusing to cut losses as it’s too painful. I’ve been there and I know how it feels to realise a loss. You wait and wait for the price to return to your buy price, but it never happens.
This cognitive bias is price anchoring. You’re anchored to your buy price. This applies to both buying and selling. Buying at a low price and refusing to add more shares until it drops to your buy price. Another form of price anchoring.
The thing is you don’t need to make your money back from the same stock. Instead, you should sell your losing position and take back your remaining capital. Then deploy this capital into a better investment opportunity. This way, your capital is being utilised on a better company, instead of praying for the lousy company to return to its glory days.
As the saying goes:
Time is a friend of a wonderful business and an enemy of a terrible business.
The longer your capital is being deployed in a terrible business, the larger your losses will compound.
Conclusion
It’s important to have self-awareness about our own investing biases. If you don’t know what mistakes you’re making, how will you improve?
Are you guilty of any of these 3 mistakes?