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Four Mistakes You Can Avoid When Investing

Investing is a marathon and not a sprint. Therefore, applying a consistent strategy might be more important than finding mind-blowing returns and seeking instant gratification. And, a consistent strategy that helps to minimize errors can also be more important than you might imagine. Here are four common mistakes investors tend to make, and how you can avoid them:

1. Becoming a fan

It’s often the case where investors fall in love with a product and become interested in the company behind the product. That can be dangerous as great products do not necessarily convert into great profits.

For example, if you have always enjoyed dinning at the different concepts run by Tung Lok Restaurants (SGX: 540), such as Lao Beijing and Tung Lok Seafood, it might be easy to miss out the the fact that the restaurant business is highly competitive and the company has been struggling to make a profit for the past few years.

2. Timing the market

Most investors feel they have some special insight into the market’s short-term movement and thus are able to time the market much better than the “average” investor. However, there is no evidence that a market-timing strategy is more effective than a passive strategy of buy-and-hold. Most of the time, the stock market is extremely efficient and trying to time the market will only end up in disappointment – plus you’ll get slapped with high trading commissions to boot!

3. Focusing on just earnings

Many a times, investors tend to focus too much on just earnings. They do not realize that a company’s cash flow is just as important.

Property development is a business where cash flow is not easily generated, as most of a developer’s profit has to be reinvested into new land banks for further development. For example, Keppel Land (SGX: K17) has not been able to generate huge cash flow from its operations despite having decent earnings over the past few years.

Year Earnings Operating cash flow
2010 S$1.05 billion -S$1.15 billion
2011 S$1.37 billion -S$938 million
2012 S$838 million -S$647 million
2013 S$886 million -S$1.37 billion

Source: S&P Capital IQ

4. Panic selling

During a market sell down, like what happened during the 2008 Global Financial Crisis, many investors will be selling due to fear. However, that might be one of the worst mistakes to make; it is also one of the hardest mistakes to avoid.

Having a good sense of the real value of the companies we invest in might give us more confidence in holding on to them during severe market declines.

Foolish Bottom Line

Often, these are mistakes we can avoid but at times, we might commit these errors in the heat of the moment. Fortunately, with an awareness of these possible mistakes, we will be able to address the issue more effectively.

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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 Stanley Lim doesn’t own shares in any companies mentioned.