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2 Major Types of Investment Mistakes You Could Be Making

Credit: Terrance Heath

I like to talk about the mistakes I have made during my investment journey, and these are some of the first things I will tell people when they ask me how I’ve fared so far.

Why would I rather focus on the mistakes made and not the positive events which have turned out well and given me decent returns? This is because I feel that mistakes are events which we can learn from to improve ourselves as investors, and when we narrate our mistakes to others, it also helps them to learn and become wiser investors.

With that, let’s look at two major categories of mistakes an investor makes when it comes to investing.

Mistakes of Commission

Mistakes of commission are those involving the purchase of a stock which subsequently does poorly. In such cases, the investor would end up losing money. Some of the possible reasons could be:

i) Buying at expensive valuations and failing to account for the role of expectations which have been priced into the share price;

ii) Not doing sufficient or proper due diligence – the investment thesis is thus flawed and cannot stand up to scrutiny, resulting in the company suffering from either losses or declining revenue and earnings; and

iii) An unexpected event occurred which altered the investment environment or industry outlook for the company, resulting in poorer than expected prospects. The original upside anticipated by the investor is thus no longer applicable.

This category of mistake is fairly common as everyone out there has probably purchased a company which became a dud or lemon, or they had failed to account for certain factors when making the investment, which resulted in a capital loss.

To prevent such mistakes, the investor should ensure he is aware of the level of expectations which has been priced in, and also to undertake proper, comprehensive due diligence and to apply sound judgement when it comes to selecting stocks to buy.

Mistakes of Omission

Mistakes of omission are defined as companies you should have purchased but neglected to, resulting in profits which were missed out on. Investors do not lose any money through such mistakes, but it’s more of an opportunity cost as it means that the capital could have been better deployed. Though such mistakes may not seem serious at first glance, missing out on an excellent investment may mean an investor may miss out on years of compounding. Such errors should, therefore, be evaluated seriously.

For myself, I keep a record of companies I have analysed and passed over in favour of another, just to review if it may turn out to be a serious mistake of omission. I encourage other investors to do the same as it would help one to learn, over time, about what makes a great investment and what should be avoided.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.