Success (and failure) leaves clues. You can model the traits of the greats, and vicariously learn from the mistakes of those who’ve blazed a trail before you. You should not start or scale up your investing until you learn and then master some very important fundamentals. You can start with no experience because every winner was once a beginner and every master was once a disaster.
Here are 7 beginner mistakes even experienced investors make, so you don’t have to:
1. They Invest in what they like and not what works
What works usually isn’t shiny or sexy. Tobacco companies have worked for Buffett. Rundown small single let dwellings work for property investors better than new builds. The watches that go for more than a million are nondescript, often worn-looking. All that glitters is not gold (even gold). Do not let your emotion cloud your analysis, ensure that you run the numbers not the ego and invest in assets that appreciate regardless of how they look or what friends and the golf or squash club would think about it.
2. Chasing hotspots, cycles, wormholes and trying to time the market
Warren Buffett says you can likely predict “what will happen, but not when it will happen”. You know the markets go in cycles of booms and busts, but trying to time your entrance and exit is speculation at best and most likely a complete gamble. Don’t chase hotspots, amazing one off opportunities or fast in-and-out smash and grab trades, because volatility works both ways. You have to factor in entrance and exit fees which can eat into any profit you might get lucky to make. You can’t have momentum and compounding working for you in short term trades. Your favourite holding period should be forever, and then earn off the income rather than risk all the capital for a small gain.
3. Fear & greed
Extreme emotions erode profits. Too bullish and you don’t take time or care to research the downsides, and too bearish and you never make any decisions. And no decision is still a decision. Beware polarised emotions and look to balance out with a more contrarian view. “Be greedy when others are fearful and fearful when others are greedy”. When things are going well, save and plan for when they won’t in the future. When things are in chaos, sit on your hands and ride it out. Never sell when everyone else is, or buy when everyone else is. “Observe the masses, do the opposite”.
4. Too fast & too slow
Another extreme emotion or action is investing too quickly, or too slowly. Research, but then invest something, Start small and invest money you could afford to gamble away. Test with real, but small amounts of money, because paper trading doesn’t prepare you for the real world. Be skeptical, but to a point, then make a decision. If you are desperate, the market will sense it and someone will sell you something/anything. If you procrastinate, you will miss a lot of the growth opportunities.
5. Too early & too late
Disruption creates opportunities. But if you get in a class too early, it may not get though the initial chaotic start up phase. It’s wise to let vehicles and strategies prove themselves. But a lot of the bigger, faster money is made in the early adopter phase, so if you wait too long and the asset matures, you then get competition, regulation and a slow down in the growth curve. If you go in early, use capital you can afford to lose. If you go in late, expect a slower rate of return. Never run in, or run out, because that is what everyone else seems to be doing.
6. Over or under diversify
Too many assets too fast and you can’t manage them all. You spread your capital so thin it takes so long for compounding to kick in. You have to pay fees across more classes/investments, and as such it might take you years or decades to gain any momentum. But too focused in one class, and you risk disruption, regulatory or market changes out of your control, and you are over exposed and under protected. If you hold all your assets in cash and rates drop, you have a problem. If all your assets are in property and there is a crash, you have a problem. Focus to get started, diversify to grow, protect and insure your wealth. Have one main investing strategy and 1-3 supplementary strategies. Invest low risk for protection, like maxing your ISA allowance every year, investing in well managed funds, come physical or precious metals, and then your main focus that might be property, for example, or your main business.
7. Over & under leverage
If you gear up too highly, you are vulnerable to small market changes, bank recalls and low income streams. If you under-leverage, it will take you decades to build any investment and income momentum. If you can borrow against an asset class, you can leverage bank and private capital to build a larger, quicker asset base. Stick to sensible loan to value ratios (50% to 70%). Good debt can be leveraged to gain more equity, but there’s always a price of debt so ensure the repayments are easily manageable and there is a good buffer of income to cover the debt, both in terms of the monthly repayment and the final capital sum.
Ensure you seek smart counsel. Get great mentors who are already successful. Balance your risk; never bet the house but remember
“If you don’t risk anything, you risk everything”
– Rob Moore