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One Important Mistake to Avoid In Investing

mistake

In 1983, 16 grandmotherly ladies in their 70s who lived in the United States in the city of Beardstown, Illinois decided to form the Beardstown Business and Professional Women’s Investment Club.

Each member contributed an initial investment of US$100 in seed money and subsequently added US$25 per month into the portfolio. They liked to buy shares in companies they knew and understood, and they paid attention to the fundamentals.

Soon, their fame spread far and wide as they reportedly averaged 23.4% returns annually from 1984 to 1993, almost double the Dow Jones Industrial Average’s (a widely followed American stock market index) 11.7% annual returns in that period.

They became known as the Beardstown Ladies (link opens to a website that may require the registration of an account) and even wrote a book about their triumphant exploits titled “The Beardstown Ladies’ Common-Sense Investment Guide”.

But something was amiss. Turns out, the Ladies had miscalculated their returns; they had mistakenly included their monthly additions into their return figures. When that was stripped out, the Ladies’ returns became ‘only’ 9%, significantly lower than their much-vaunted but incorrect 23.4% annual returns –  the 23.4% figure turned out to be the returns the Ladies’ got for their 1991-1992 performance.

Sadly (and perhaps rightfully so), they soon slipped back into anonymity as the public realised that they were not all that they made out to be.

And in there, is a simple, but very important mistake that investors can often commit: a failure to accurately track their returns.

It’s important because the opportunity costs can be immense when we pick the wrong investments but yet unknowingly stick with it because of a mistaken notion of success.

Take the Ladies’ example. Had they been more aware of how their returns had trailed a simple stock market index like the DJIA, they could have experienced much higher returns in the decade ending 1993.

The DJIA would have turned every $10,000 invested in it at the start of 1984 into $30,000 by the end of 1993; in contrast, the Beardstown Ladies would have grown their portfolio into only S$23,700, some 21% lower than the Dow’s return.

For a more local flavour, let’s examine the period from 11 Apr 2002 to 31 Oct 2013. According to S&P Capital IQ, in those 11-and-a-half years, investors in the newspaper publisher Singapore Press Holdings (SGX: T39), the bank DBS Group Holdings (SGX: D05), and property developer City Developments (SGX: C09), might have been more than satisfied with their total returns (where dividends are reinvested) of 92%, 114%, and 117% respectively.

But, that pales in comparison with a simple index tracker like the SPDR Straits Times Index ETF (SGX: ES3). The exchange traded fund tracks the Straits Times Index (SGX: ^STI) and had returned 160% after adjusting for dividends in the same time frame, which is the longest easily-available track record the fund’s showing.

A S$30,000 portfolio invested into equal amounts of SPH, DBS and City Developments from 11 Apr 2002 to 31 Oct 2013 would have become slightly more than S$62,000. In contrast, the same S$30,000 dunked into the ETF would have grown to become S$78,000.

While my choice of individual shares here can be seen as cherry-picking, it does serve to bring home the point that mistaken notions of success in individual stock-picking can be very costly indeed when there are easily available alternatives for investors to just invest in the entire market.

And since we’re on the topic of mistakes, here’s another one for you to think about: Investors can sometimes boast about the success they’ve had with specific trades but yet lose out on a whole in terms of their portfolio.

A spectacularly successful but risky trade might work once, but can it do so over the long haul? That’s something that many might fail to consider when taking into account the efficacy of their own ‘investing’ strategies, especially when the focus is only on the success of a handful of trades while sweeping a multitude of failures under the rug.

When investing, what’s really important is how well our entire portfolio grows, not how well one or two trades have done. Let’s not lose track of that.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.