We all make investing mistakes. Some of us more than once (I know I have). The key is to recognize them, and recognize the steps to address them. I share some thoughts on the progress I've made.
Becoming emotionally involved
By nature, we all become emotionally involved when we have to part with our hard earned money to buy something. Stock investments are no different. Imagine you've just bought a new car. You realize the week later that you could have bought it for a few thousand dollars less. No doubt you kick yourself, curse your bad luck. The same thing is true with stock investing. One tends to curse themselves if the company that they've just bought declines in value. And the steeper the declines, the more the frustration builds up. Unfortunately, that's just one of the realities of investing.
Buffett puts it best. In the short term, the market is like a voting machine. In the long term, it functions more like a weighing machine. Short term movements have too much noise. Reacting on the basis of these movements can force you to think that you should sell out and by back in later. Wrong strategy. Too many trading costs involved which eat up your valuable cash flow. And you become a market timer. It's very hard to do this successfully when you compete against algorithmic traders who can automate trades in milliseconds based on market movements.
So ignoring market movements and becoming emotionally detached is your best bet. I used to be far more emotionally involved with my stock portfolio. Constantly checking, fidgeting and adjusting.
The good news now? I've significantly reduced my need and interest to check my account balance and stock prices. I'm really happy with the progress I'm making here. Not checking and not logging into my accounts means less chance of trading on impulse. In my books, that is a really good thing.
Selling too early
I've been guilty of this in the past. I often bemoan my shortsightedness in selling out MasterCard too early. I have held Mastercard stock on and off since it had its initial public offering in 2006. While I didn’t get stock in the initial offering itself, I was able to pick up some stock shortly after listing at around $50/ share. I flipped a substantial portion of my holding in Mastercard a few years later in 2008 for almost $200 a share. I was feeling pretty proud of myself for having realized close to a 4x return.
Had I held on to all of my Mastercard stock, instead of the small parcel that I was left with, my $5k initial investment would have been worth more than $100k!. I got greedy and settled for 4x upside, when I should have let time do the work and just ride the returns.
I like Buffett's comment here as well, that if you have picked the right business, your favorite holding period should be forever. I've done much better with this this year. In a year of significant market turbulence in 2020, I turned over less than 5% of the portfolio value, largely to reposition and take advantage of better opportunities.
Too much margin lending
Margin lending almost broke me in 2008. It almost completely scarred me from investing. In 2008, I was one of the many people who happened to get carried away with high levels of debt to buy stocks. As stock prices soared in 2007, so did the level of debt that I would look to put against stocks. I tried to play it safe by picking what I thought were big blue chip banking stocks on juicy dividend yields.
In fact, going into 2008, as stock prices fell, I thought I was “averaging down” and would continue to buy more. I thought this was going to be a prime time to pick up some solid dividend income from some very dependable companies. I was using margin to buy more and more of Bank of America, Citigroup. Unfortunately for me, the stock prices of these companies kept falling and falling. Eventually, I wasn’t able to keep buying down and had to sell stock at lower prices than what I bought for. To make matters worse, they also cut their dividends as well.
My net margin lending picture is significantly better at present. I can't say I have eliminated it, but it has been substantially whittled down, to around 10% of portfolio value. I don't expect to add to the level of margin debt I carry at this point. In fact, I think we will look to gradually work this completely off over the next few years.
Not Buying During Market panics
This one is not so much a mistake as a missed opportunity. Buying during market collapses can be a great way to make some serious money, and potentially collect some nice income. It's like getting 50% off on a growing annuity income stream. Having said that, its really hard to summon up the courage to wade in and buy.
2020 was a great year to put in place lessons learned from the past crashes and I managed to substantially add to positions, and pick up new positions that were in many cases down 20-30%. The reactions in 2020 were really the result of learning and implementing lessons learnt from previous declines and the opportunities that resulted.