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Four big investment mistakes

If you want to be a successful investor, it’s really important to analyse your mistakes.

It’s also worth looking at some of the classic mistakes that investors make. In this video, Ed Bowsher looks at four of the biggest investing clangers so that you can avoid making them.

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Transcript

Hi, in this video I'm going to look at four big investment mistakes. I've made all of these mistakes myself in my time and I know that a lot of private investors make these mistakes as well. So let's dive in and look at them.

The first big mistake is to buy high and sell low and that sounds obviously stupid. Why would you buy shares when they're expensive and sell them when they're cheap? But the reality is that all too many people do this and I think what drives them to do this, basically, is greed and fear.

Let's think back to the financial crisis in 2008. It was a really scary time and I quite understand why many people decided to sell up, retreat to the sidelines and just wait and see until things return to normality.

I can understand their fear, but the reality was they ended up selling their shares cheaply and that was actually the time when they should have gone out and been buying shares. It was why it was one of the great investment opportunities of the last 100 years and all too many people missed out.

Now, when you think about people buying high, it's often down to greed. Let's imagine one of your friends got a 30% profit on his stock-market investments last year. Fantastic you think. It is great and you feel jealous and you feel greedy. You want the same thing for yourself and so you go out and buy shares right now when often they're too high and too expensive. You're buying after the easy 30% profit has been made, clearly a dumb thing to do.

In reality, what you need to do is be aware of your own psychology, don't get carried away by fear or by greed and try and do a sensible evaluation of whether it makes sense to buy a particular share now. Is it cheap or is it expensive?

The second big investment mistake which actually I still do a bit now is over trading. For me, the temptation to bail out of one stock and buy one other which looks really attractive is too strong, but I know it damages my investment performance and it's a big problem for many, many private investors.

Just think about the costs of trading. With most online brokers now, it's something like £10 ago when you buy or sell. Then on top of that when you buy, there's the 0.5% stamp duty, and then, of course, there's the bid-offer spread.

If I bought some shares in Tesco at two o'clock this afternoon and you sold some shares in Tesco at exactly the same time, I'd be paying a slightly higher price than you had received. That's the bid offer spread and it's a cost you keep on incurring every time you buy and sell and doing this over trading can really make a big difference to your performance.

Only over the last 20 years, if you had invested your money into a FTSE 100 tracker fund that just goes up in line with the FTSE, you'd have probably got an annual real return of something like 5%. So that's 5% each year on top of inflation.

That's how much your money would grow, so over ten years, your £1,000 at 5% a year would grow to over £1,600 and then you'd add inflation onto that. Well, I think if you over trade, you'd probably cut your annual return to something like 3% a year. The costs of buying and selling, the stamp duty, the bid on offer spread could easily knock 2% off if you turned your portfolio over around twice a year.

If you're only getting a 3% return, your £1,000 after ten years rises to a bit more than £1,300. That’s a 63% return here over a decade, 34% return there over a decade, don't over trade.

I'm really working hard to try and cut back on my trading. I'd urge you to do the same. I always think I'm selling out of a stock to go into a better one, but all too often the reality is my original investments were just as good as whatever I'm going into instead.

The third big mistake is what I call the ‘closed mind’, often known as falling in love with the stock. Back in the early noughties, I bought a buyer-tech stock called Pfizer Pharm. It was developing drugs for obesity and for Alzheimer's. It looked great to me.

The trouble was neither drug ever got regulatory approval and I lost practically all my money. My mistake was that as soon as I found out about Pfizer Pharm, I quickly fell in love with it. I made my decision to buy Pfizer Pharm and then hold it. Then I looked for arguments to support my decision.

If I saw an argument against Pfizer Pharm, I'd dismiss it and I'd just go and find out something else to convince me I was making the right move. So, what you should do if you're going to buy a share is evaluate all the evidence, all the pros and cons and make your decision. What I did was make my decision and then look for arguments to support it. I had a closed mind. I'd fallen in love with the share. That’s a massive, massive, mistake.

The final mistake is what I call the ‘illusion of control’. Let's imagine that you made 30% last year on the stock market. Well done, fantastic, I'm really pleased, but don't start imagining you're an investment genius. You probably just got lucky and if you think you're a genius, the risk is you'll start making dumb decisions.

This year, you'll get carried away and start taking really high risks that will end in failure. So, don't have the illusion of control that you control the stock market and you're the boss, you're the genius. You're not.

So, that's four big investment mistakes I've looked at. There are many more I might look at in future videos. Don't forget we've now got more than 150 videos on our investment archive. You can see all the videos in the archive at moneyweek.com/youtube. I'll be back with another video soon, so until then good luck with your investing.

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