Seven Things an Investor Shouldn’t Say
Following a shock Election result, Tim Bennett revisits seven key messages for long-term investors.
Successful long-term investing can be pretty dull. As Nobel Prize-winning economist, Paul Samuelson, once put it “Investing should be like watching paint dry or grass grow”. Meanwhile Warren Buffett, US billionaire, has warned of the dangers of “capricious and irrational behaviour” from stocks causing investors to “behave irrationally” themselves. So, as we ponder yet another surprise election result, here is a reminder of seven things that a sensible long-term investor shouldn’t say or do, tempting though any of them can sometimes be.
“It can’t get any cheaper”
When a stock, sector or indeed an entire market, lurches in one direction, people often abandon their long-term strategy and look for a short-term gain. For example if a stock price falls from pounds to pence, you will hear people say “it can’t get much cheaper than this” having done very little homework to reach that conclusion. The truth is that at any price, a share can still fall to zero and cost you up to 100% of your investment in the process. A low price does not make a share necessarily cheap just as a high share price doesn’t automatically make it expensive. Also remember, as the saying goes, that no-one calls a bell at either the top or bottom of a stock market cycle nor can anyone reliably predict how markets will react to short-term events.
“I banked my usual 10% gain and moved on”
Having a buy and sell system is fine but sticking to it too rigidly can be a mistake. Worse it can be evidence of a lazy approach to share ownership. Judging if and when to finally sell a stock isn’t easy but the risk here is that you fail to spot the opportunity to run a winner plus if you apply a fixed, mechanical approach to buying and selling in a volatile market you may end up trading too often.
“This many people can’t be wrong”
Making money is any asset class, including stocks, requires an ability not to just follow the crowd. With shares the risk of doing so is compounded by the fact that they can rise and fall quickly and sharply at times and often the biggest changes of direction occur close together. So, for example, by panic-selling in a dip you may miss out on one of the best upward moves when a stock bounces. This is one of the key reasons why private investors often underperform even a broad index. The message here is: do your own homework and stick to your guns. You won’t always be right – few people are – but you will avoid following other investors down a rabbit hole.
“Once the stock recovers I will sell it”
Anchoring to past events is a natural human trait as is the desire not to lose money. The problem is it can lead us to hang onto a losing position long after the facts have changed and we should have moved on. The trick is not to become obsessed with the price we once paid for an asset and be realistic about a share’s future prospects. Otherwise money that could be put to work somewhere more profitable may be left languishing.
“I had to sell shares to raise funds”
There is nothing wrong with selling shares to meet a foreseeable call on capital according to your overall investment strategy. However, liquidating shares to meet a short term emergency is a mistake. It is tempting to do so sometimes because shares are relatively liquid but it may lead us to sell at precisely the wrong moment and also to start to view our long-term investment portfolio of Lifetime Savings as a piggy bank – it isn’t!
“I was unlucky”
We all suffer bouts of bad luck. However, it is all too easy to pin poor decisions on it whilst taking all the credit for investment decisions that work out well. The best investor are also the most honest – recognising when they enjoyed some luck and being realistic about bad, or ill-informed choices. Above all they learn continuously from their mistakes rather than bemoaning their poor fortune.
“I will ride this out by sitting in cash”
Stock markets can be volatile but that’s no reason to abandon shares during difficult periods to hunker down in cash. The reason is that to do so successfully requires two very tough judgements – the first is when to sell and the second is when to buy back in again. In the middle, an investor watching the market rise, perhaps having thought it would fall, will suffer plenty of sleepless nights. As Brexit, the US Election and now the UK’s “snap” Election results have shown, no-one really knows either how to forecast events or how stocks will react to them. A successful long-term investor won’t worry unduly about either.