MENU

Two Mistakes Investors Tend to Commit

One of my favourite investing aphorisms comes from the venerable Charlie Munger, vice-chairman of giant U.S. investment holding company and conglomerate, Berkshire Hathaway. Munger once said, “Tell me where I’m going to die, that is, so I don’t go there.”

When applied to the stock market, it’s really about knowing the actions that can easily create losses so that we’ll be able to avoid them. In that spirit, here are two common investing mistakes that investors tend to commit. Nip those in the bud, and your portfolio will have a few more reasons to thank you for.

1. Having a short-term focus

Market participants with a short-term focus tend to trade the most, and studies have shown that the faster a retail investor trades, the lower his or her returns.

Thing is, while it can be tough to sit through the vicissitudes of the market, having a long-term focus puts the odds squarely in an investor’s favour. We just have to look at the experience of the Straits Times Index (SGX: ^STI) – the historical odds of making losses in it have been shown to be dramatically reduced as one’s holding period lengthens.

2. Disregarding valuations

Billionaire investor Warren Buffett (who is chairman of Berkshire Hathaway) once wisely quipped that “Price is what you pay, value is what you get.” Sometimes, the market gets carried away by irrationally optimistic expectations and that manifests itself in shares getting awarded sky-high valuations.

2007 was quite a banner year for having companies that were showing over-stretched valuations; those expensive shares subsequently collapsed and led to investors having to suffer painful losses even till today. And the thing is, those companies weren’t obscure shares with tiny market capitalisations – they were big blue chips or established mid-caps!

Some instructive examples include Keppel Telecommunications & Transportation (SGX: K11), CapitaLand (SGX: C31) and City Developments (SGX: C09).

With Keppel T&T, it was selling for 57 times its trailing earnings at a price of S$4.70 per share on 11 Oct 2007. That was the date on which the Straits Times Index had closed at a peak of 3,876 points before the Great Financial Crisis of 2007-09 swung into full gear. At the trough, the index was dragged down by close to two-thirds. But since then, the index has recovered by quite a fair bit and is now just 16% below its pre-crisis peak. For Keppel T&T however, its shares are still 62% below where it was on 11 Oct 2007 at its current price of S$1.765. Even though its earnings have gone up by close to 40% since, its shares have suffered badly as valuations came back down to earth.

The same goes for CapitaLand and City Developments with both property outfits being priced at very high multiples of their tangible book value back in 22 April 2007. Despite the Straits Times Index being at more or less the same level now as it was back then, the former’s still down by 61% while the latter has lost 29%.

Foolish Bottom Line

Nassim Taleb, currently a Professor of Risk Engineering at the NYU Polytechnic School of Engineering, once said: “People focus on role models; it is more effective to find antimodels – people you don’t want to resemble when you grow up.” It can be the same with investing; it’s perhaps more effective to know what you should not do.

Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool's free investing newsletter. Written by David Kuo, Take Stock Singapore tells you exactly what's happening in today's markets, and shows how you can GROW your wealth in the years ahead.  

The Motley Fool's purpose is to help the world invest, better. Like us on Facebook  to keep up-to-date with our latest news and articles.

The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Berkshire Hathaway.