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4 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. Overconfidence click here

2. Impatience click here

3. Pessimism click here

4. Ignoring the exponential function

Famed investor Peter Lynch once said that the best returns we can earn in the stock market would come in the third, fourth or fifth year after we have made the investment. He also said that from one year to the next, our stock returns are akin to a coin flip – our stocks could go up just as easily as it could go down.   

To illustrate his argument, let’s look at the yearly as well as compounded returns for tourism asset owner Straco Corporation Ltd (SGX: S85) between 2009 and 2014. The numbers are summarized in the table below:

2015-12 Straco Returns Table
Source: Google Finance; author’s calculations

If we look at Straco’s stock price change on an annual basis, there have been some years in which the change has been smaller (7.7% in 2010) and other years in which it has been strong (72.3% in 2014).  The real eye-opening returns that Lynch talks about appears when we stack up the annual returns and look at the compounded returns over the same five year period.

What might have driven the rise of Straco’s stock price?  In the chart below, we can see that the returns of Straco have been supported by the company’s growing profits, operating cash flow, and free cash flow:

Straco's operating income, operating cashflow, free cashflow, and net income
Source: S&P Capital IQ

From the example above, we can see that the best returns occur when we take the exponential function (compounded returns) into account. When we tenaciously hold stocks of great companies for the long-term, that’s when we can let the exponential function work its magic for us.

Foolish summary

There can be things or traits that trip us up as investors. Overconfidence, impatience, pessimism, and ignoring the potential of long-term exponential returns are four investing enemies we may want to take note 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.