I made plenty of mistakes as a personal investor as well as a professional one.
I still remember one of my first big win was a Uranium producer in Australia. I had no idea about the business model, I just read some news that there is more demand coming from China and I bought it. No analysis whatsoever.
It was pure beginner’s luck. It turned out to be a really bad experience because it led to me believing I was better than I really was and investing is so easy.
I ended up losing a lot of money along the way and I got demotivated. I also became an analyst later and compliance made personal trading very stringent. I also had no time for it.
Therefore, in between, I missed a lot of opportunities in making and losing money myself but I got to speak to a lot of people that went through that emotion managing other people’s money.
To me as an ex analyst, I genuinely believe the analysis part is overvalued but the mindset under.
I believe mindset and discipline is something you have to develop over time so begin early.
It is a way of knowing yourself. Are you a fundamental or technical person or both? Are you more short term driven or long term? Everyone says they are long term but when your positions move against you, do you panic or can you grind through? Have you set stop losses such that when the position touches that you cut loss no matter what or do you give yourself more excuses to carry the loss? Do you keep records of all your trades and mark down the reasons for each decision? Such that you know not to make the same mistakes again and your blind spots.
Given the efficiency of markets and availability of modern-day information, the level of transparency meant any one can analyse stocks. Therefore, the alpha to be generated from traditional valuation methods is getting razor thin. Practically, it means it is extremely difficult to identify gems.
I genuinely believe for every trade you enter, there is a 45-55% winning ratio. Some people can go to 60% but that’s rare on a consistent basis. Therefore, what matters is how do you time and size the trades such that you win more when you are right than you lose when you are wrong.
I believe the difference therefore, lies in being discipline, ability to carry losing positions, for example, are you borrowing money to fund your trade such that there is an asset/liability mismatch or you just simply panic too much and can’t sleep at night so you have to cut loss.
The below are some of the mistakes I made as an investor.
Listened to my friend’s advice or in fact anyone
Listening to advice from others is a big trap. You may believe a friend because you know and trust him so he’s got credibility but does he really know his stuff? Even then, he can be still wrong. A stock tip is a stock tip, nothing more, nothing less, you still have to have your own mindset and framework to go into for each particular trade.
Full sized in one go, didn’t average in
When I traded before, what I usually do is to enter the full position all in one go. I would do all my analysis, realise valuation is higher than the current share price and enter the trade. This is a bad way of investing because I am placing all my bets at one point. It goes against the rules of diversification because current price reflects current information. What I came to realise is that it is much better to enter trades averaging in. Professional investors usually initiate a position with a placeholder. That’s how you get a better feel of the stock, is it reacting to the way you are expecting. If it confirms your belief and start moving in favour, you can add more. You may feel bad because you missed out on some of the gains but on the flip side, had it move against and you had conviction, it is a better entry point. Sometimes stocks move not because of reasons you thought so I believe averaging in is the best way to achieving consistent returns long term.
Panicked when things go wrong
This is a matter of not having enough conviction because not enough homework, mentally not prepared or cash flow matching issues. However, on the contrary, too much conviction can be bad too if you are really wrong. To be a true investor is to understand this art and know the balance.