Not Being Professional
A realistic expectation is the key to being professional about investing, and this includes being able to accept losses with equanimity. In addition, just like any other profession, knowledge and expertise will go a long way. Successful investors feverishly consume information and hone their skills. It is prudent to put together a set of rules at the outset as it is human nature to overextend when the pressure is high or the temptation is too great. Striving for high standards at every stage of the investing process would be a good habit to form. An investor cannot afford to keep his rose-coloured glasses on as he will be swiftly set to right by the market, and the lessons the market teaches are real and painful.
Although it is important to take note of the market sentiment, facts and numbers will trump in the long run, and however tempting it is to take others’ advice and tips, common sense and less self-doubt are the strengths of a thinking investor.
Individual investors are constantly being exhorted to try beating Wall Street at its own game of trading like crazy to chase whatever is hot. But why should you bother trying to play a game that even most professional players can’t win?
Instead, take a page from Mr. Spier’s book and play by your own rules. The faster Wall Street runs, the more you should slow down and step back from that madness. Buy and hold an index fund forever, or study a few stocks with all the peace of mind you can muster.
That way, you exploit the true advantages of individual investors that most professionals would kill to have: patience, independence and the ability to ignore the braying of the crowd.
Using Worn Out Models
In an article featuring Howard Marks, he mentioned a Japanese concept called ‘mujo’, defined as the ‘the turning of the wheel of the law’. Marks said,
Change is inevitable. The only constant is impermanence…. We have to accommodate to the fact that the wheel turns and the environment changes.
One such example is the rise of intangibles. Many parts of a company’s balance sheet are becoming increasingly unrepresentative as they fail to account for things like intellectual property, research & development or brand value. As a result some of the traditional metrics around book value are irrelevant in larger and larger parts of the market.
Not Seizing Opportunities
When prominent investors mention keeping some “dry powder”, it is easy to underestimate the importance of this remark and assume that it just means holding cash. This is a mistake. “Dry powder” does not have to be cash, but anything liquid such as an index fund.
Opportunities cannot be timed. In fact, being able to act when opportunities present themselves should be one of the tenets of investing. As Buffett said in one of his letters, “Money will always flow towards opportunity”.
From an angling site I read recently,
If you don’t fill your reel to near capacity, you’re asking for trouble. You are handicapping yourself before the battle even starts. Any game fish capable of making powerful, sustained runs is likely to spool you in a hurry, ending the battle prematurely. There’s nothing worse than watching a trophy-size gamefish pull the last few inches of line off your reel and hearing that loud “snap.” Avoid this situation by putting the proper amount of line on your reel, following the manufacturer’s specifications for the pound test you are using.
You wouldn’t take on a bear with a sling shot, so don’t attempt to catch a tough, oversized game fish with a rod and reel that’s not appropriate for the task. Many anglers lose fish simply because they are using the wrong type of tackle. Make sure your equipment is right for the specific angling assignment. Arm yourself with a reel that holds enough line for the type of fishing you’ll be doing. The drag should be powerful enough to put the brakes on your adversary, and allow you to gain back line quickly and efficiently. If you’ll be dealing with speedy predators, make sure your reel has a fast enough gear ratio to keep up with a fish running toward the boat. Select a rod that’s matched and balanced for the reel you are using. If your rod is too light for the job or poorly constructed, you won’t be able to gain on your fish and work it to the boat. Worse yet, the rod can even break under the pressure of a larger adversary. Choose a rod that’s sensitive enough to detect lighter strikes, but also strong enough to get the job done.
Not everything is applicable here, but it’s interesting to note how prepared one has to be even if it’s just to catch a fish.
Going For The Wrong Combination of Stocks
Different companies behave in different ways and promise different types of returns with accompanying probabilities of risk. In investing, there is the ‘promise’, and then, there is the ‘protection’. Understanding what can reasonably be expected from a particular type of stock for example, and how each stock correlate with one another help towards forming a well-diversified portfolio.
As I see it, investing can either be akin to shooting darts at a pub or playing a game of chess. In darts, you shoot and hope that as many darts as possible strike where you want them. Or, just like chess, you can treat all holdings as valuable pieces in your portfolio, with their relative strengths and purposes working together to achieve the desired return.
Not Reinvesting Promptly
The dividends and additional savings accumulating in your account need to be reinvested. Time matters. Either reinvest in your current holdings or find new ones. To be able to do that, you have to constantly search for new investing opportunities and have a list of them ready. As much as investing is about patience and inaction, it is also about taking actions. Don’t let opportunities languish because of your indecision.