2 Investing Enemies You Should Avoid

There are good traits to learn for investing and then, there are things to avoid.

If there are enemies to good investing, they can take the form of undesirable behaviours like overconfidence and impatience. Like a muddy swamp, traits like these may hold us back and hamper our progress toward being better investors.

Taking note of their existence may help us avoid them.

1. Overconfidenceclick here

2. Impatience

History is littered with examples of how impatience have destroyed investors.

One of the most telling instances is Rick Guerin. He was once labelled as a superinvestor by Berkshire Hathaway Inc Chairman Warren Buffett. Unfortunately, Guerin fell into some investing hard times, in part, due to his impatience for getting rich.

In an interview with my colleague Morgan Housel, money manager Mohnish Pabrai recounted the story of Guerin that was told to him by Buffett:

“And [Buffett] said, Charlie and I always knew that you would become incredibly wealthy. And he said, we were not in a hurry to get wealthy; we knew it would happen. He said, Rick was just as smart as us, but he was in a hurry [emphasis mine].”

Impatience led Guerin to lever up on his bets when investing and ultimately, it didn’t end well. During the fierce 1973-1974 bear market in the U.S., he was forced to sell his Berkshire Hathaway shares to Buffett at US$40 per piece in order to raise cash to meet margin calls. Those same Berkshire shares are worth close to $200,000 each today.

Earlier this year, a hedge fund manager seemed to fall for the same trap. In this case, the hedge fund manager had made a series of concentrated bets on options (options are inherently leveraged financial instruments; notice a pattern here?) in January this year due to the poor returns he had earned in the month before.

But like Guerin before him, there was no happy ending. The hedge fund manager ended up with a catastrophic 99.8% loss. He had US$100 million in his fund in 2014, and yet was left with just US$200,000 by January 2015.

The examples above are telling because there are better, less rushed ways to invest.

In a previous article, my colleagues have shown, theoretically, how a modest monthly amount which is put into the SPDR STI ETF (SGX: ES3) – a proxy for the market barometer the Straits Times Index (SGX: ^STI) – may have the potential to provide decent gains. From its inception in 2002 up till the end of October 2015, the SPDR STI ETF has returned around 7.2% annually.

Foolish summary

There can be things or traits that trip us up as investors. Overconfidence and impatience are just two investing enemies we may want to be wary of.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.