Learn from My Mistakes: Avoid These 4 Investing Pitfalls
I recently wrote an article about mistakes. In it, I briefly mentioned a few early investing mistakes I made. Since writing that post, I’ve talked to friends who are making many of the same mistakes. Whether due to human nature, nurture, or a combination, making simple investing decisions is not easy. I hope you can learn from the mistakes I’ve made as an investor.
The errors are generally due to making simple concepts overly complex. It’s natural to want to solve complex problems, and when they don’t exist, we create them. E.F. Schumacher said of complexity, “Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius — and a lot of courage to move in the opposite direction.” Even knowing the value of simplicity, I still fight the urge to overcomplicate my life, investments, schedule, relationships, health, etc.
When I reflect on the errors I’ve made, I try not to look through a harsh or critical lens but an informative one with an eye towards improvement. Almost all the investing mistakes I’ve made fall under one of these categories:
Selling a great stock too early:
Sometimes, I come across a company that I love and develop a very confident thesis. On several occasions, armed with my research, I purchased stock to hold while the company’s capital investments and execution turned a vision into reality. Foolishly, I sold several great companies far too soon. Realizing profits is part of the investing process, but selling winners simply because of short-term price increases often counter long-term success. Warren Buffet once described the stock market as “a device for transferring money from the impatient to the patient.” If an investment thesis remains intact and no more attractive options have been identified, it’s best to hold, despite a surge in price. The stock of an innovative company with visionary leaders can rise for a very long time, and exiting a position to lock in short-term gains could prove costly. Investors with superior track records often owe a great deal of their performance to a handful of stocks that surged many times higher over years or decades. Recognizing exceptional opportunities does little good when the timeline is too short.
Not buying a great stock due to “high-valuation.”:
I’ve studied many great investors like Benjamin Graham, Warren Buffett, and Monish Pobrai, so value is always on my mind. However, the current valuation is only one factor. I missed getting in early on several uber-successful companies like Shopify because they looked “too expensive.” Companies that are rapidly growing command a high valuation. Will Danoff of Fidelity Contrafund fame credited his mother, saying, “The price is forgotten, the quality remains.” While valuation is an important consideration, its importance must take it into context. I’d rather own a great company with a bright future that looks expensive today than a company with poor growth prospects that trades at an attractive price today.
Over-allocating to a “sure thing.”:
Overconfidence leads to over-allocation. Over-allocation can lead to under-performance. At times I was so confident in the due diligence that I invested too much. Sometimes it worked out. Sometimes it didn’t. Certain investments might deserve larger allocations than others, but there is no such thing as a sure thing. Each time I’ve done this, I knew I was taking an outsized risk. But I did it anyway. I believed the hype I was generating in my mind. There is no sure thing; every investment should be made within the framework of your objectives, risk tolerance, and time horizon.
Listening to the noise:
Investing is a boisterous business. Everyone has an opinion. Media pundits, social media influencers, and even your Uber driver have views about the market’s future direction or a hot stock, and they aren’t afraid to share them. Unfortunately, most of them are shit. The phrase “often wrong but never in doubt” comes to mind. When the market heats up, everyone is suddenly an expert, wildly speculating on high-risk assets. When an inevitable correction occurs, fear, uncertainty, and doubt spread like wildfire. Unfortunately, the noise often signals the wrong behavior. It leads people to sell when they should take advantage of discounted prices and buy when they should be cautious. In the past, I’ve convinced myself that these “experts” know what’s best and abandoned my investing principles. I regretted it later.
Don’t overcomplicate it.
Over long periods, the markets will provide a tailwind; if you adhere to basic principles, you will likely benefit. Identify solid companies with strong growth prospects and hold them. Don’t worry about every market pullback; learn to see them as opportunities. Add to your investments when you’re able. Tune out the noise; it’s not there to help you. If you can limit your mistakes and keep a long-term orientation, your odds of success are very high.
Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from James Vermillion, and all rights are reserved.
