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How to Become a Better Investor

At first glance, investing and tennis seem to be completely different activities. But, a close study of tennis can yield surprisingly useful insights about investing. I say this because of the following astute observation from Swedish economist, Erik Falkenstein:

“In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

If you’re a beginner, the easiest way to become a better investor is to follow Falkenstein’s advice and to concentrate on not making mistakes. Even if you’re not a beginner, well, it wouldn’t hurt to pay heed to Falkenstein’s words too. After all, even the investing maestro Charlie Munger also once said, “Tell me where I’m going to die, that is, so I don’t go there.”

So, what are some big mistakes investors tend to make? Here’re a few.

1. Trying to time the market

The 20 years ended 2013 saw the S&P 500 (a broad market index in the USA) deliver a compounded annualised return of 9.22%. Meanwhile, the average mutual fund (the equivalent of unit trusts here in Singapore) investor in the USA earned a return of just 5.02% per year.

That big difference in return between the index and that of the average investor can be simply explained by investors trying to time the market. Instead of patiently staying the course with a fund or their investments, the average investor in the USA had been too busy jumping in and out of their mutual funds in a disastrous attempt to catch the ups and downs of the market.

2. Not paying attention to valuations

Overpaying for shares is a common affliction which plagues investors. We only have to take a look at the example of three of Singapore’s largest real estate companies, namely, CapitaLand Limited (SGX: C31), City Developments Limited (SGX: C09), and Hongkong Land Holdings Limited (SGX: H78).

Back in September 2007, CapitaLand and City Developments were priced for perfection while Hongkong Land carried a way more reasonable valuation.

Share Price to tangible book value: 1 September 2007
CapitaLand 2.4
City Developments 2.7
Hongkong Land 0.9

Source: S&P Capital IQ

What happens next with their share prices shouldn’t be too much of a surprise:

Share Price: 1 September 2007 Price: 9 September 2014 % Change
CapitaLand S$7.40 S$3.32 -55%
City Developments S$14.90 S$9.81 -34%
Hongkong Land US$3.84 US$6.86 79%

Source: S&P Capital IQ

3. Paying too much attention to the market

Investors often worry too much about where the market as a whole might be heading next without paying enough attention to the most important thing driving long-term stock market returns for a share – its corporate performance.

Take for instance, Singapore’s share market barometer the Straits Times Index (SGX: ^STI). It hit an all-time high of close to 3,900 points in October 2007; today, after seven years, it’s still 15% below where it was back then.

But for shares such as Raffles Medical Group Ltd. (SGX: R01), Super Group Ltd. (SGX: S10), and Dairy Farm International Holdings Ltd (SGX: D01), where the market went had no bearing on how they did. Since the STI hit its all-time high, the trio have gained 165%, 204%, and 101%, respectively. Given their earnings growth (as seen in the chart below), their share price gains in the face of a market decline would start to make some sense.

earnings growth

Source: S&P Capital IQ; EPS figures for 2014 are based on last 12 months’ numbers

Foolish Bottom Line

There are of course more mistakes which investors tend to make but trying to avoid the three I’ve just shared can be a good place for you to start in trying to become a better investor.

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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 writer Chong Ser Jing owns shares in Raffles Medical Group and Super Group.