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5 Things You Should NOT Do When Investing

Credit: Neil

Charlie Munger, investor extraordinare and long-time sidekick of Warren Buffett, has shared plenty of investing wisdom over the years. One of my favourite sayings of his is this: “Tell me where I’m going to die, that is, so I don’t go there.”

It illustrates the importance of negative thinking, the act of thinking about what not to do. With that, here’re a list of “Don’ts” in investing that I’ve compiled for myself which I think might be useful for many other investors too.

1. Don’t jump in and out of shares.

Plenty of ink has been spilled by researches on this topic. An instructive example would be the landmark study done by finance professors Brad Barber and Terrence Odean which showed how investors who traded the most underperformed the market by up to 6.5% annually.

2. Don’t underestimate the power of time.

The simple act of staying invested through long stretches of time can help stack the odds of success mightily in our favour.

For instance, there has never been a 20-year period between 1871 and 2012 (more than a century of market history!) in which an investor who held the S&P 500, a broad market index in the U.S., had lost money.

Similarly, if we measure the Straits Times Index’s (SGX: ^STI) return at the start of every month from 1988 to August 2013, there has never been a 20-year period in which an investor would have suffered losses.

3. Don’t blindly invest in a company because it looks cheap.

Print-advertising outfit Global Yellow Pages Limited (SGX: Y07) was selling for just 2.4 times its trailing earnings six years ago at the start of 2009 – that’s a dirt-cheap valuation. But today, its shares are some 80% lower after its earnings per share had shrank from 8.4 Singapore cents to just 0.2 cents over the same time frame.

Lesson here: a cheap valuation can’t give us much protection if the share’s underlying business collapses.

4. Don’t overpay for a company’s shares.

If you had bought CapitaLand Limited’s (SGX: C31) shares at its pre-financial-crisis peak of S$8.60 on 26 April 2007 more than eight years ago, you’d still be down by 38% to S$3.67 today even after accounting for reinvested dividends. The reason? CapitaLand’s shares were valued at 3.2 times their book value back then – that’s an expensive price to pay.

On the other hand, if you had paid just 0.5 times CapitaLand’s book value to buy its shares at S$1.98 on 1 March 2009, you’d be sitting on some 85% in gains right now.

5. Don’t fret about what the economy is going to do.

It’s near impossible to tell how the economy would move over the short-term. And even if you could, there’s very little about it that can tell you about what stocks would do next. The chart below shows how various well-known U.S. economic and financial indicators had fared when it comes to forecasting what U.S. stocks would do over the next 10 years:

Economic variables and future stock market returns

Source: Morgan Housel at fool.com

As you can see, even rainfall (yes – rainfall) tells us more about future market returns than GDP, corporate profit margins, and bond yields does.

So, treat shares as a piece of a business, study the business, think about what the business can do in the future, and leave all armchair economi-sing to others.

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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 doesn't own shares in any company mentioned.