Our Two Worst Investing Habits

Some things never cease to amaze me about life in Singapore.

Just when I think I know everything there is to know about the Little Red Dot on the equator than something quite unexpected happens that knocks my socks off.

One of those surprising things happened a few evenings ago, as I stared blankly into the luscious trees outside my third-floor apartment window. From out of the blue, two of the most beautiful Oriental pied-hornbills glided onto one of the outstretched branches directly opposite me.

Predictable behaviour

Evidently, the pair of black-and-whited plumaged birds had returned to their nest for the night. Being creatures of habit, they flew back the following evening and the evening after that. Their habits are so predictable that I can set my clock to their daily routine.

But what has this got to do with investing?

As investors, our habits – just like that of the Oriental pied-hornbill – can be quite predictable too. In some instances, our predictable behaviour can work in our favour. But at other times it can work against us.

Knowing our good habits from our bad ones can help us become better investors, over the long term.

Overpowering herd

Probably one of our worst investing habits is to follow the herd. It is an easy trap to fall into because it can be hard to think differently, especially when the behaviour of the masses can be so overpowering.

Consider the recent shocking stock-market crash that brought down bourses around the world. The arguments put forward by the so-called experts for the sharp drop in stock prices seemed too persuasive to ignore. It is a pity they weren’t quite “expert” enough to foretell the crash, though.

Nevertheless, it convinced many to ditch their shares in the face of crumbling stock prices, which brought prices down even further. The wave after wave of selling spread around the world before someone realised that the experts had told us nothing that we did not already know.

What we know

We know full well that China is undergoing a transition, which would necessitate a slowdown in its economic growth. Meanwhile, the US is on the cusp of raising interest rates – anyone who believes that the cost of borrowing can remain at near-zero is clearly not paying attention.

Another of our terrible investing habits is anchoring. This is when we develop an unhealthy emotional attachment to a stock. Anchoring is very hard to shake off. But if we let emotions influence our investment decisions, then we are never going to make sound and logical judgments.

Uncanny similarity

There is an uncanny similarity between the two investing bad habits – they both complicate a simple process, which is to buy good shares at a good price.

Thankfully, both shortcomings can be easily overcome – by simply forgetting about the price that we pay for a stock. That way, we force ourselves to always look at the current share price in relation to how a company could perform in the future.

We need to know why every stock in our portfolios deserves to be there. Their inclusion should never be based on the price we paid for them. Instead, they should earn their inclusion based on their current share price.

If they appear ostensibly cheap, then we should consider buying more. If they are overly expensive, we might consider giving them the boot. Investing is really as simple as that.

A version of this article first appeared in Take Stock Singapore.

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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 Director David Kuo doesn’t own shares in any companies mentioned.