Becoming better at anything usually involves needing to reflect on our errors. Stock picking (and holding) is no different. Here are three investing mistakes that have held me back over the years and how I’ve tried to overcome them.Â
Mistake #1: Having too little/too much patience
Unless I’m queueing for petrol, I like to think of myself as a patient soul. However, there have been times over my investing journey where I’ve been unable to sit on my hands. This has usually involved snatching at profits ( FTSE 100 stock Halma springs to mind) or selling on a bit of temporary bad news (step forward online casino operator 888). Just to muddy the waters somewhat, I’ve also been too patient at times and waited for a recovery that never arrives. Sometimes it’s better to get out, stay out, and take the loss.
There’s no perfect solution here. However, simply getting into the habit of reflecting on exactly why I’m wanting to act/not act is a start. Keeping a journal and revisiting my reasons for buying a particular stock also helps. Has a company’s strategy changed? Is this now a better business? If yes, why sell?
Mistake #2: It’s all about the price
The ‘buy low, sell high’ mantra persists because it’s patently good advice. However, investing mistakes arise when I tend to put too much weight into categorising something as ‘cheap’ or ‘expensive’. An expensive stock becomes a bargain if the underlying business grows massively. A cheap share can become cheaper if the underlying business is failing.
Now, let’s not get silly here. I’m not suggesting a stock trading on a P/E of 20 is somehow cheaper than one trading on a P/E of 10. My point is simply to look beyond this basic metric and ask whether the price is fair relative to what I’d be getting for it.
Does the company consistently deliver great returns on capital? Is it unfairly valued compared to sub-standard rivals? Does it have the finances to withstand a stock market crash? If so, I’ve likely found a good business worth paying more for.Â
Owners of Fundsmith Equity will know that Terry Smith always puts quality ahead of price when picking stocks. To date, this has enhanced rather than impeded his returns.
Mistake#3: Listening to the noise
It’s remarkably easy to assume that the more information I gather about a stock, the greater the edge I have over my peers.
This tactic isn’t necessarily irrational. Finding a promising company that’s flying under many investors’ radars can sometimes generate incredible returns. Think Argo Blockchain from December 2020 to Feburary 2021.Â
That said, any information-grabbing exercise must always consider the quality of the source. Back in the day, for example, I’d pay attention to forums and social media sites like Twitter. There would be the odd useful nugget among the dross, but the signal-to-noise trade-off was invariably poor.Â
These days, my approach is far more focused and reflects my limited time. My first port of call is always the London Stock Exchange’s news page. I’ll also listen to podcasts or audiobooks from/about proven investors (William Green’s ‘Richer, Wiser, Happier’ is highly recommended).
Again, this won’t guarantee great returns. Even the best are still susceptible to investing mistakes. Nevertheless, standing on the shoulders of identifiable giants rather than unverifiable online personas sounds far less risky.