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Common investing errors to avoid

Sunday, February 18, 2018

Investors of all stripes make mistakes from time to time.

It’s just the nature of being human in a world of many unknowns.

Most investing errors are usually errors of ommission (leaving some stone unturned) or commission (inaccurately accounting for some possibility).

The biggest error however, lies in not analyzing or reflecting on why we made the errors in the first place.

Understanding how our brain works will always be one of the key factors in any investors success.

That said, a couple errors always seem to recur.

One such error that many investors succumb to lies in overreacting to the latest news about companies.

Most times, investors emotionally pile in on good news and rush for the exits on bad news, causing prices to overshoot and also missing opportunities that a more sober approach would allow them to capture.

Making buy or sell decisions because of some “latest news” without careful thought and analysis as to why we should even take such actions in the first place typically leads to bad outcomes.

For example, if a company reports an increase in earnings, our brains might feel something golden and jump on the bandwagon.

Does that mean we should buy it right away?

Without careful thought, we could be doing ourselves more harm than good.

This brings me to a second common mistake that should be also avoided: focusing on results rather than process.

Famed investor Seth Klarman said it best: “A good result says nothing about whether the process involved was a good one and whether or not the success might be replicable.”

It is to the peril of the investor to ignore process.

You could have a good process but a bad outcome.

Or you could have a bad process but a lucky outcome.

The bad process/lucky outcome combination is worse because it sets investors up for a higher likelihood of failure in the future.

One final error that seems to trip up even the wisest investors from time to time is the habit of looking in the rearview mirror.

Our expectations about future events can be distorted by past experiences.

Thinking too much about the past can cause a level of hesitancy that borders on an immobilizing fear when it comes to taking risks.

Such fear can cause investors to miss genuine bargains that exist in the market.

All told, investing success, at its core, can be a game of error-minimisation.

As Warren Buffett once said: “You only have to do a very few things right in your life so long as you don’t do too many things wrong.”

Andre Worrell


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