Are You Making This Key Mistake That Many New Investors Make?

I remember that on the day I first started to learn tennis when I was 13, my dad had gone out to buy me a cool racket model that’s used by the professionals.

Unfortunately, I soon realised that the racket might be “too professional” for me – it was heavy, had a large grip, and only had a small contact area. The racket would likely work well for a tall and fit tennis professional with strong arms and a great ability to aim his hits.

But, for a short and skinny 13-year-old like myself back then, that cool tennis racket wasn’t very useful. So, I went to buy myself a much lighter beginner’s racket with a large contact surface. My game then promptly improved.

Why am I talking about tennis here? Well, it turns out that the mistake I had inadvertently made while learning tennis is not unique to the sport – it is the same mistake that many new investors might make as well when investing.

A tale of two games

It’s often the case where we think that we can be great at something by simply copying what the professionals do, including what they wear, how they act, and the tools they use. Problem is, things don’t work that way.

In his book “Investment Policy: How to Win the Loser’s Game,” author Charles D. Ellis discussed the conclusions that Dr. Simon Ramos, a scientist and statistician, had about the game of tennis:

“In expert tennis, about 80 per cent of the points are won; in amateur tennis, about 80 per cent of the points are lost.

In other words, professional tennis is a Winner’s Game – the final outcome is determined by the activities of the winner – and amateur tennis is a Loser’s Game – the final outcome is determined by the activities of the loser. The two games are, in their fundamental characteristic, not at all the same. They are opposites.”

The key insight here – that amateurs and professionals actually play a different game – applies to investing as well.

Too many amateur investors participate in the investing game by following what the professionals do. That is a key mistake – before we learn how to win, we have to first learn how not to lose.

Foolish Takeaway

So, for investors who’re just starting out investing, they’d first have to learn how to limit the risks they take in the market by focusing on making less mistakes. Placing the issue of valuation aside first, one good way to minimise errors would be to avoid speculative companies and stick with firms with predictable earnings, like Singapore’s largest telco, Singapore Telecommunications Limited (SGX: Z74).

Only by first getting the basics right (cutting down on erroneous shots) can we try something fancier (hitting winning shots) – before we can even consider joining the Winner’s game, we should master the Loser’s game first.

To learn more about investing and to keep up to date on the latest financial and stock market news, sign up for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. Also, like us on Facebook to follow our latest hot articles.

The Motley Fool's purpose is to help the world invest, better.

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 does not own any companies mentioned above