Many investors focus their time and attention on the analysis of the fundamentals of a business in order to discern its future prospects and what the future may hold. While it is certainly commendable to conduct such due diligence, investors should realise no matter how much analysis they perform, it would be useless if they did not exhibit the right behavioural traits.
Analysis and portfolio management skills are important, but I would argue that the right psychology and temperament are even more vital. I’ve seen investors with very sharp insights and keen analytical skills, but their temperaments cause them to constantly sell good stocks and hold on to lousy ones, thus causing serious damage to their long-term stock portfolios.
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Here are some guidelines on the behaviours you should adopt in order to become a much better investor.
Don’t be so jumpy
It’s natural for share prices to fluctuate constantly, and sometimes in large increments, without any explainable reason. Investors who do not understand or accept this end up becoming too jumpy, and get either too excited when the share price rises, or too gloomy when it falls.
Jumpiness is bad because it creates action bias — the feeling that you always need to do something to “protect” your portfolio when the given movements are actually just normal share price fluctuations on a given day.
Stop asking for tips
A very bad habit investors often have is constantly asking others for “hot tips” in order to identify the next “winner.” There is no point in conducting due diligence on Company A if you’re only going to fall head-over-heels in love with Company B just because a friend claims to have insider news. Such rumours and unsubstantiated claims could get investors into hot water, as it ends up being a game of speculation instead of relying on cold, hard facts.
Avoid frictional costs like the plague
Investors know that returns are already not easy to come by, as a lot of research and hard work are involved in ensuring one purchases great companies with a requisite margin of safety. Therefore, frictional costs such as commissions and brokerage fees should be avoided like the plague, as these serve to further erode returns (and magnify losses).
The key here is for investors to transact as infrequently as they can, as companies need time to grow. Impatience often results in frequent buy/sell decisions, and the investor’s returns can be diluted away as these costs add up over time.
The Foolish takeaway
The above are some behavioural traits investors should be mindful of if they want to improve their investing track records. This is by no means an exhaustive list, though, and I would strongly encourage investors to read more about the relevant behavioural aspects of investing.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.