A new year and a new decade have arrived.
As you start afresh, the last thing you want to make are silly mistakes that get you off to a bad start, and harm the performance of your portfolio.
That said, mistakes are part and parcel of investing.
No one is infallible. I am sure that every investor, including myself, has made their own fair share of mistakes while investing.
LEARNING FROM MISTAKES
We don't have to make mistakes to learn from it. It can be instructive to learn from the mistakes that other investors make.
That way, we can learn without suffering the consequences associated with these errors. We also stand to become better investors over time.
So, as the new year rolls in, here are two big mistakes you should avoid if you want to perform well as an investor.
A common mistake among investors is overconfidence.
This undesirable trait can cause problems such as poor decision making, excessive risk-taking, and acting stubbornly when a change of mind is needed.
Every investment decision is a calculated risk.
But overconfidence can blind investors from the risks.
That is because overconfident investors tend to assume that they know much more than they really do. In doing so, these investors may ignore the risks that do not conform to their investment thesis.
This situation can be dangerous, especially when a thesis does not pan out due to flawed reasoning or analysis.
Preventing overconfidence is not easy.
After all, overconfidence is a state of mind that is tough to identify and even tougher to admit to, as no one likes to be told that they are wrong.
When your personal pride and ego are at stake, it can be tough to admit that you have been overconfident in your analysis.
As investors, our defence against overconfidence is to remain objective dealing only with the facts, evaluating both pros and cons in a logical manner.
Getting a trusted friend to judge your investment decisions can also prevent you from falling into the overconfidence trap.
The second big mistake that investors, including myself, regularly make is anchoring.
Anchoring refers to the process whereby your mind gets fixated on a particular reference point, even if that reference point becomes invalid or irrelevant.
This mistake usually crops up when investors evaluate whether they should or should not sell their shares or lock in a profit.
For example, if an investor had purchased shares at $1.00 apiece, and the share price is now $1.20, he would be happy to sell as he has now made a 20 per cent profit.
However, the growth prospects of the company in question may make it much more valuable than $1.20.
Thus, if the investor goes ahead to sell based purely on his anchored buy price ($1.00), he would miss out on significant upside should the company go on to do splendidly in future.
In this case, anchoring caused the investor to sell out much too soon instead of letting their capital compound over time.
On the flip side, anchoring may also be detrimental to an investor who refuses to sell away his investment at a loss.
Using the same example, if the share price plunges to $0.50, the investor will stay anchored to his purchase price of $1 and doggedly wait for the share price to return back to his purchase price before letting his shares go.
This stance makes no sense at all as the business may have deteriorated to a point where it is justifiable to trade at $0.50, or even less.
In such a case, investors would be doing themselves a big favour by divesting a poorly-performing position to switch to a better performing one.
GET SMART: STAY ALERT
Mistakes will be made.
As investors, we have to ensure that mistakes that we make are minor and will not blow large, irreparable holes in our portfolio.
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This article was first published in The Smart Investor.