As an investor I have made mistakes. Some have been costly – but also valuable. Investing mistakes have helped me learn how to act more carefully in future.
Here are five potentially costly investing mistakes I now focus on avoiding.
Investing mistake 1: too much focus on one share or sector
Imagine if I had bought Apple, Amazon or Greggs when they were relatively cheap and ridden them a long way up. I would have been pleased with my return. But I also might have stopped looking elsewhere.
Diversification is a crucial risk-management tool in investing. I know that. But if I think a stock has strong prospects, it can be tough to remember why diversification is so important.
That investing mistake can be costly. No matter how attractive a share or sector seems to be, no one can guarantee future performance. What if I’d bought shares in just a few ultimately unsuccessful companies? I’d be a very unhappy investor.
Investing mistake 2: not doing my homework
Buying shares can be like purchasing a car or house. Whatever the external appearance, it pays to look closely at the details.
A good example of that in recent years was roadside assistance group AA. At first glance, this would have struck me as attractive. It had a respected brand name, a strong business model and significant cash flows.
But looking at the annual accounts would have revealed the company’s huge debt pile. The company was taken private again this year at just 35p a share – leaving some shareholders 90% down from their 2015 purchase price.
Fortunately I did not buy AA. A quick look at its balance sheet online was enough to put me off.
Investing mistake 3: leaving my circle of competence
As an investor I do not worry about only understanding a few industries. But I do worry about stepping outside my circle of knowledge.
It is a common investing mistake to chase higher returns by investing in companies or industries one does not remotely understand. But legendary investor Warren Buffett fastidiously sticks to what he knows. I’m following his example.
Investing mistake 4: ignoring my investment strategy
I find it helpful to have an investment strategy. This can start very simply and evolve over time. But it helps me remain clear about what I want to achieve through investing. It also focuses me on applying consistent principles as to how I will try to achieve my goals.
I admit it can be tempting to ignore it. In the past few days, for example, I weighed opening a position in Bacanora Lithium. But I followed my investment strategy and decided against that move.
My strategy is not fixed forever. I set it and can change it. But defining my strategy and sticking to it helps me discipline my investment choices.
Investing mistake 5: encouraging confirmation biases
There are risks in tobacco shares, not least the decline of smoking in key markets. As a holder of British American Tobacco and Imperial Brands, it could be easy for me to downplay that. It’s always comfortable to confirm what one thinks, for example by cherry-picking information sources.
To help avoid that investing mistake, I always try to see the other side of the investment case on any shares I consider. That can be painful – but hugely helpful.