Four investing mistakes to avoid
When I started institutional stockbroking in London, a wise woman said to me: "You won't get more than 50% of your recommendations correct." At the time, I was quite shocked, but with experience I have come to appreciate that stock picking is not about being 100% correct.
There is as much luck involved as there is acumen and analysis, which means understanding what you are doing and why is so important. Equally having some strong boundaries around your investing process, will you assist.
Here are four investing mistakes you can look to understand and avoid.
1. The trend is your friend until it isn't
Digging into the weeds of companies is challenging, even for experienced analysts. As much as the nerds that love to crunch company financials will tell you it is all about the numbers, successful company analysis and stock picking is as much about the intangible aspects, such as culture and quality of management. Selecting good companies is an art and a science.
For those that look at only the share price movement, they will only be capturing a small keyhole into the success or otherwise of a company. Share prices move up and down for a multiplicity of reasons, including sentiment and expectations.
One example is US biotech Ely Lilly which is up 70% this year and has only now reached the price it was in 1953.
Another example is a company that reports an earnings decline on the previous year and the stock price goes up. Much of the reaction can be attributed 'expectations' and from where the share price has come. If the results are better than anticipated the price will on most occasions rise, but a day or week's movement does not necessarily tell the whole story.
2. The narrative doesn't equal good stock picks
Whether it is the decarbonisation secular growth theme or the artificial intelligence narrative; investors can become caught in the hype around the narrative or the story and fail to appreciate that the not all companies will monetise a positive secular trend, even if the TAM (total addressable market) is in the trillions of dollars.
The same investing principles apply to a narrative or secular megatrend as any other macro-economic backdrop. Buying companies with strong cashflow generation and the ability to grow dividends is extremely important, particularly in an environment which has prevailed of higher interest rates, and potential slowing in economic growth and the demand.
Nvidia is a current case in point and Tesla was the poster child for secular EV trends. Understanding the company is as important as picking the correct narrative.
3. Assessing the 3 Ps - possible, plausible, and probable
Many of the investing mistakes gravitate around understanding the differences between what the outcomes can be. Anything is possible, but not every outcome is plausible and probable.
Investment expert and Professor, Aswath Damodaran, the 'Dean of Valuation', who teaches valuation at New York University, states that to improve your chances of investment success you should aim to capture all the '3P's' in your stock picking process.
Investing in a company that uses high risk new technology or a biotech is a case of always possible and usually plausible, but the probable is what makes these types of companies highly risky.
4. Know yourself and the companies you invest in
In volatile times it is important for you to have long term goals in place and acknowledge how you can emotionally process when the share market falls.
Nothing is worse than seeing your hard-earned savings fall in value, on paper.
A loss is not a loss until a share is sold and over the years, I have sold great companies, when it would have been better to hold onto them.
Equally when a share price runs ahead of the fundamentals then it is easy for the company to disappoint during earnings season.
Understanding your risk disposition - cautious versus aggressive and the companies you invest in, will help you navigate both the good and the bad times.
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