We have a business of dealing with investors and that is why we have a tendency to find common mistakes in investing. I keep taking notes and wish to share these learnings today. Here are some common investment mistakes that we see prevailing around us.
These may be old or new, but these common mistakes in investing call for caution. These mistakes may not be so talked about but very important while shaping a good financial future.
7 New Common Mistakes in Investing
Investors want the future to be like past
It is never possible. If a fund or stock has given you 17% CAGR it never means history will repeat.
Past performance is an indicator of performance in the future, not the roadmap.
For successful investing, we have to balance between being prepared for the good times and to last the next bear phase.
Driving is done with help of rear view mirror, but looking through the windscreen is the way forward.
So disappointment that “it performed in last 10 years but why not this year” has no meaning.
Investment means Returns will be linear
Prices or NAVs don’t care that you hope to achieve a 20% return in the next 12 months.
They also do not care that you have a Diwali Ahead or you need 5% every quarter.
They are just like your emotions which sway with information. So expectation needs to be modified if you have time frames in mind.
In “The Money Game” by Adam Smith” described how emotional people get when investing.
He wrote, “A stock is for all practical purposes, a piece of paper that sits in a bank vault… The stock doesn’t know you own it. All those marvelous things, or those terrible things, that you feel about a stock, or a list of stocks, or an amount of money represented by a list of stocks, all of these things are unreciprocated by the stock or the group of stocks. You can be in love if you want to, but that piece of paper doesn’t love you, and unreciprocated love can turn into masochism, narcissism, or, even worse, market losses and unreciprocated hate.”
Investors think about investment performance instead of the goals at hand
Not everybody can be a security analyst or a forecaster, but first and foremost, thoughts – Buy or Sell.
You are just concentrated on price targets today and not your goals in the future. A small correction is thought as bear phase and bear phase as the end of investments. Goals are overlooked or postponed supply of funds. Are any goals cheap?
Admitting that you started wrong is an EGO issue
Most people do not start or again start even they know their investment is wrong from starting. How can you admit that you were wrong the entire time?
Many times people do not change other investments as they fear facing losses. There is nothing wrong with taking a small loss, but big losses are hard to recover from financially and emotionally.
The best way to prevent large losses in future and spoiling the most important thing (time) is to take small losses.
People appreciate social approvals
Most people in my office talk in loud voice describing a new idea – For Eg “I think I will start trading Nifty Futures”. They want someone to overhear and approve it.
It’s comforting when some article or someone on television says something positive about the investment that you own or wish to invest. Confirmation bias is dangerous as it gives you motivation. If it is wrong, it is wrong and does not correct it by getting it approvals form people who do not know your investment or your situation.
Graham: “You are neither right nor wrong because the crowd disagrees with you.”
Overconfidence is underplayed by many
People misidentify one time luck as a perfect model or skill that they have better information than others.
Many people think they are above average whether it comes to intelligence. Overconfidence that they have developed the special ability to know markets beforehand.
They preach and when they are right sometime due to luck, they tend to pick overconfidence.
They start handling more risk than they actually can. The common mistakes in investing is -forgetting limits.
I see these as very dangerous investors as they influence people around them and this means they create their own clones. More clones mean markets becoming riskier.
Investing is NOT a topic to socialize
A foreign bank organized an event with their super-rich investors. They were called for an evening together and to their surprise, they were flown to Udaipur in a charter plane (from Jaipur) for a dinner at Lakeside. Is this investing or socializing? … because what will bankers & investors talk about? Investments.
Do you think this is a good way to invest? Under social influence?
Many times, you will be part of a group who are called for sessions by product manufacturers. They can be in form of awareness programs or product launches. They are done with a group so that influence can be maximized.
But the right way is purely based on your needs & plan.
Do not let yourself be a guinea pig? Why you be a part of some social experiment?
That’s all for now.
Will share some more common mistakes in investing in the next phase of markets!
Please share your views in the comments section below.
