Because hey, there apparently aren’t enough list posts on the internet. So let’s look at the biggest mistakes investors make.
If you’re anything like me, your life is filled with regrets. Even though I’m with someone I’m happy with, I still wonder what would have happened if I would have made a move on that girl I liked when I was 17. In 2003, I hemmed and hawed for too long, and didn’t buy shares in McDonalds, after slumping sales and the movie Super Size Me helped push the shares down all the way to $13. A decade later, the shares hit a high of more than $100. I have a million more of those stories, especially during the 2009 lows.
But it’s okay. It’s not your fault that you miss out on opportunities. Besides, if you said yes to everything that ever went through your head, your life would be more chaotic than an episode of Family Guy. And that show is make believe. All we can do as pitiful humans is learn from our mistakes.
I see a lot of mistakes investors make. Here are five that they struggle with constantly (including me), and some tips on how to avoid them.
1. Mega-cap bias
This is by far one of the biggest mistakes investors make. They place a premium on companies that are big and are household names.
On the one hand, there’s value in having a brand name everyone is familiar with. Nobody is about to show up one day and usurp Coca-Cola, or Microsoft, or any other huge company. These companies have gigantic moats, and the value of these moats is very real.
The flip side is these companies never get truly cheap. Even during 2008-09 when the market was doing its best Hiroshima impression, shares in mega-caps sold off, but didn’t get nearly as inexpensive as small caps. If I knew then what I know now, I would have been running around like a chicken with my head cut off. scrambling to buy small caps.
Small caps get priced inefficiently by the market all the time. We’ve talked about it pretty much ad nauseam. The smaller the company, the less people who follow it. Instead of competing against millions of investors who exclusively buy mega-caps, you’re competing against thousands. It’s a huge advantage.
2. Selling when it breaks even
I’m guilty of this as much as anyone. I’ll own a stock that’s gone down and I no longer love, for whatever reason. Instead of selling it right away, I’ll wait until I hit break even. It’s dumb and I have to constantly remind myself not to do it.
Instead, try your best to forget everything about the price you paid. It’s painful locking in a loss, but if you’re convinced a stock is going to do nothing and you have a solid potential investment somewhere else, it’s okay to sell. You’ll have a better chance of getting that money back in a different investment, assuming your analysis was correct.
Besides, selling and moving on could trigger a capital loss, which reduces your taxes. And it gives you the ability to reset the investment, not burdening yourself with an investment you know is down.
3. Buying at 52-week highs
Tread carefully with this one, because a lot of the time, buying at 52-week highs is a sucker’s game.
Sometimes, when I’m looking at a stock, I’ll like everything about it. It’s trading at a nice discount to book value, it’ll have some positive earnings, and it’ll have the potential to go much higher. The only problem is that it’s trading at near a 52-week high. Usually, those stocks go on the watch list, and I hope to buy when it falls 25%.
If it’s a stock that’s $2 and it has spent significant time over $10 in the past, the 52-week high stuff doesn’t matter so much, especially if it’s a small cap with $5 in book value. If it’s a small cap that’s $2 and has a book value of $0.50 and an all-time high of $2.50, I’m probably avoiding it. Context is important.
4. Not setting sell targets
Warren Buffett has famously said his favorite holding period is “forever.” I’m not sure I should be arguing with the Oracle of Omaha, but I think his advice is misguided for a lot of investors.
Selling is just as important to a retail investor’s long term success as buying, especially if you can do so tax free in a registered account. Every day, Mr. Market is giving you a price for the little chunk of a company you own. Some days, he will be selling it to you at a discount. Other days, you’ll be able to sell it at a premium. It’s your job to lock in profits when the market’s premium is extra high.
Here’s what I do. I look at 10-year highs, and take about 10% off the highest level. Let’s use Reitmans, a stock I’ve bought for the Uproar Fund, as an example.
Back in the 2006-07 time period and between 2010-11, the stock touched $20 a few times, but spent a bunch of time trading in the $18 range. I knocked a little off, and got a nice target price of $15.75. Since the stock is only currently $6.41, I don’t have to think much about the target price for probably years.
When the time comes (or if I decide to sell in the meantime), I’ll take a look at whether I want to sell at exactly $15.75, or whether I’m willing to wait a little longer to get a little more profit.
5. Worrying too much about fees
Don’t worry, passive investors, I didn’t leave you hanging. This one’s for you.
Let’s say you’re first starting your investing journey, and you’ve got $10,000 invested in equal parts in TD’s E-Series Funds. These mutual funds are some of the cheapest on the market, with an MER of just 0.30%.
But then, you hear about Questrade and its free ETF trades.
What a deal! Y’all should click that right away and get yo’ self a Questrade account.
And suddenly, you’ve seen the light. Various ETFs have management fees of just a third of TD’s, 0.10%. That’s a 66% cost savings! You’ve heard that fees will kill investor returns, so you start making the switch from TD’s cheap mutual funds to ultra cheap ETFs.
Congratulations, you just saved yourself a whole $20 per year.
Is $20/year really worth your time to transfer all your accounts to a different financial institution? I wouldn’t do it, unless I had a different reason that was more important. I’m all about saving a few bucks, but sometimes you gotta realize when something isn’t worth your time. Beginning investors should spend far more time saving than trying to optimize their returns by a few tenths of one percent. It’s the investing equivalent of counting squares when you wipe.
That about concludes the biggest mistakes investors make list. Want to add your own? The comments are just a finger swipe away.