If you avoid making these mistakes, you will have an easier, more prosperous summer

We know it’s June and school is almost over, but before you head off on summer break, let’s look at five more mistakes investors commonly make. Don’t think of these lessons as work; instead, think that if you avoid making them, you will have an easier, more prosperous summer, while you sit back and drink Mai Tais as your money works more efficiently for you. You’re welcome.

Chasing Hot Investment Trends

Do we really have to explain why this might be an investment mistake? Chasing investment bubbles can be dangerous. A simple rule is this: If you are repeatedly hearing about an investment theme in the media, or at your neighbour’s BBQ, you might already be too late.

In the early days of a hot theme, investors can make a ton of money. Typically, though, valuations get completely out of whack when everyone is participating in a trend. Promoters start hyping garbage companies only remotely connected to the theme. A theme can certainly work for a while, but make sure your investment is backed up by solid numbers, not just hype.

Letting Emotions Guide Your Decisions

We know this one is tough. No one likes losing money, and fear can be a very powerful emotion. Panic selling has probably cost investors more, collectively, than any other action. But greed is also powerful. Visions of a cushy retirement dance in your head when you have a stock rising every day. A stock up 50 per cent might even make you so happy you want to buy more of it. Here’s when things get tricky.

We love momentum stocks, and the best move is often to buy more of a stock when it is up a lot. Obviously, the company is doing well in such cases, and more investors are taking notice. More buyers can indeed change the valuation of a company.

But let’s not forget the basics here. Don’t let greed push you into having one company represent 30 per cent of your portfolio. Sure, sometimes this will work. But when it doesn’t, a whole portfolio can be killed. Stay calm, manage your portfolio positions and look at the fundamentals over emotions — always.

Not Doing Enough Research

After 35 years in the business, we’re still surprised by how little research investors do before they buy a stock. Some look at price-to-earnings ratios and dividend yields, and that’s about it. Even professional investors often don’t do enough homework. During COVID-19, a famous investor talking on television about lending platform Upstart Holdings Inc. became completely flabbergasted when asked what the company actually did. He, unfortunately, became a meme.

Look at the company’s income statement, look at the balance sheet. Read all the company’s public documents and go through its investment presentations. Look at its history: Has the company done what was planned? How much stock does management own?

Analyzing Too Many Things

We once worked with a fund manager who was quite brilliant, but he had a flaw: he needed to know everything about everything. He was obsessed with the smallest details, and the most inconsequential data points. Having a manager who is that detailed might sound good, but it is not. That’s because 99 per cent of all the data coming at you is not important.

There is so much noise in the investment world that it becomes a skill in knowing what to ignore. Spending too much time on useless data means that a portfolio might be neglected, or, worse perhaps, spending days researching a single analytical point might mean you are missing out on better investment ideas that pop up (always).

We don’t have the space here to list all the inconsequential things investors don’t need to worry about. But ask yourself when investigating a press release or company action: Is this actually material to the company, or is it just fluff or, worse, hype? This will save you a ton of time and frustration.

A Stock Price Does Not Equal Its Value

It does not always automatically mean a company or investment is bad when you see the stock drop a lot. Likewise, a soaring stock price does not always mean it is a great investment. Sometimes (many would say often), the price of a stock has no relation to company fundamentals. Stocks trade on sentiment and emotions (see above), and they trade on macro factors such as interest rates.

Does a business change for better or worse by 50 per cent in only six months? Not often, but thousands of stocks will easily move up or down 50 per cent or more in six months.

The key is to focus on fundamentals. If a stock declines while fundamentals are improving, it is usually worth buying. Many investors, however, will see the stock decline and simply assume there is a problem. Sometimes, there is. But investigate before selling.

Take Care,