Ten mistakes investors must avoid
Knowing what not to do is essential when you are trying to make money
Walking on eggshells? Here is my Top 10 list of common blunders made by investors:
1. Letting your investment adviser act like he is managing "other people's money": This can be a dangerous attitude, particularly if your manager is rewarded on the upside (with performance fees) but has nothing to lose if your investments tank.
2. Overpaying for spades and jeans: There is an old saying that the guys that got rich during the 1800s gold rush were the shops selling spades and jeans, not the miners. And the investment industry is no different. The wealth driving up home prices in Greenwich was not generated from investing in hedge and private equity funds - it was from offering investments in hedge funds and private equity funds. With other people's money (see item 1), the sky is the limit.
3. Believing one has an edge: The idea that investors and traders have an edge in the global markets should be put to rest by the sheer number of dead macro hedge funds, which were presumed to have a direct telephone line into the world's central banks. But if such funds had such an edge, we would have seen a lot of hedge fund managers passing old-fashioned investors such as Warren Buffett in the Forbes' rich list. So far, none have.
There is a caveat - the more inefficient an investment (for example, private equity, non-core real estate, small-cap stocks, and so on), the more likely that someone might have an edge, although it might be difficult to work out who that is. Most likely, it is not you.
4. Timing the market: Much has been said on this point. Suffice to say, it is futile.
5. Investing and trading with emotion: The best way to illustrate this point is to watch an NBA basketball game, note when a player makes an amazing basket, and then see how often right after that great play that same player fails to get back on defence and the other team immediately scores an easy basket.
Getting caught up with emotion leads to poor decisions, especially after something especially good or bad happens. The big mistakes seem to happen when over-celebrating or mired in self-pity.
6. Over-leverage and over-concentration: These are technically two mistakes but they often occur in tandem so I have listed them as one giant mistake. If you love to maximise leverage with a few concentrated bets, I suggest you hand the investment keys to another driver. This is a path to financial ruin.
7. Not being systematic: Great investors usually stick with their plan through thick and thin, often requiring more patience than the dude who likes to watch paint dry. The wheels usually fall off when patience runs out and you start chasing the latest investment fad or changing investment approaches.
8. Over-trading: You can start to see a pattern in this mistake list: impatience, over-paying and emotions are all wrapped up in the mistake of over-trading. Commissions, placement fees, taxes and other fees and costs multiply as the number of trades increases and this simply makes your investment objective harder to achieve.
9. Not protecting one's investment reputation: As they always say in poker, if you do not know who the dumb player at the table is, then it is probably you. Likewise, in investing, if you are not continuously building your reputation as a savvy, sophisticated investor, snake-oil salesmen will burrow at your doorstep as they realise that you do not know the difference between a return on capital and a return of capital.
10. Over-relying on friends and advisers: The less time you have to spend on your investment portfolio the more money you should probably keep in cash. You need to stay plugged into your investments.
Unfortunately, the above list is not based on a scientific study in behavioural finance or a comprehensive investor survey. Instead, it is just a boiled-down list of the biggest mistakes I have seen over the past decade, over and over again. Hopefully, any mistakes you recognise will have involved other people's money, and not yours.
Robert Jones is head of FCL Advisory, which advises family offices and wealthy individuals