Hazelle
in Memos & Musings · 6 min read
One of the panelist discussions we touched on at iFAST TV was on the topic of investing mistakes to avoid for investors. It was an episode where we covered our thoughts on some actions or behaviors that an investor typically falls into given certain investing scenarios and how we would react based on our investing methodology.
We find this topic to be especially relevant in the current context as we saw the amazing run up of growth stocks after the COVID crash in March 2020 followed by its huge decline as we approach the end of 2021. Many investors would have piled up on these stocks during the bullish run but subsequently given them up when seeing how these stocks reel in huge losses, resulting in a classic situation of “buying high and selling low.”
Here is a rough transcript of what our answers were or you may also catch the full video of the discussion here.
#1: Selling because the stock price dropped too much
Kathy: In our Moneyball investing methodology, we only pick stocks that are sound when we invest in them. If the stock price of the company we choose does fall considerably, it is almost always due to a general black swan event or from negative sentiment surrounding the company. The important thing is that it is not due to a change in the fundamentals of the company and that the problems are likely to be solvable. And when it is such a situation, we will continue to hold or add to our positions. As investors, you must have the kind of conviction where if you can like a stock at $100, you must be able to love it at $70 and have no qualms about buying more at a lower price.
Investors must understand that in the short term the stock price has nothing to do with the company. The stock market is a voting machine in the short term and in the long time a weighing machine. In the short term the stock prices are either driven by the intentions of the market makers or by the emotions of the market.
Hazelle: Many investors sell when the prices drop too much partly because some of them put in stop losses. Because that is what is commonly advocated in financial media or investing books. How stop losses can be used to help to protect us are too sweet sounding. But in practice, the truth is stop losses hardly accomplish what they are meant to. Stop losses force you to choose an arbitrary figure where you cut losses, say if a stock falls more than 10%, 20% or 30% which happens more often than you think. And it is not necessarily that because there is an issue with the stock you pick but rather part and parcel of the sentiments-driven market cycle.
Hence for investors who use stop losses, they will often have their stop losses hit. They will take in the losses and the next thing before they know it, the market miraculously recovers shortly after that.
The best defense for stocks investing is not having stop losses. But rather, to actually understand how the stock market works, understand how the big boys affect the stock markets and to have a basic grasp of fundamental and technical analysis. In addition, one can mitigate his risk with asset allocation and position sizing instead. Stop losses are only needed for example if you do trading where you need to predefine your profit target and where you cut loss.
#2: Buying because the stock gave tremendous returns
Kathy: The point is not to be on the lookout for stocks that gave incredible returns. Many retail investors think that investing is about discovering the next shiny object before everyone else. It is, in fact, just about finding companies that can give above average but sustainable returns, at an attractive price when they are unloved by the crowd. That’s what most investors are missing. When they invest, they do not question if the earnings are sustainable or if the stock prices are a result of the hype. Neither do they buy with a margin of safety.
You have to be very clear on what to do as an investor. Many investors set themselves up for failure because they behave more like a trader which requires different skills altogether.
#3: Falling in love with the wrong company
Hazelle: Many investors fall into the trap of buying stocks that they are supposedly familiar with or have a good experience. Essentially when you are investing, you are voting for companies that will be strong in their earnings and to be able to grow sustainably with little or no competition. In companies where consumers don’t have many alternatives, for example when it comes to search engines, it’s Google, or when doing design related work it’s got to be Adobe. And that’s how the shares will become more valuable over time.
Remember, the financial market is not a place for you to vote for your favorite brands based on what you like. We should only fall in love with stocks that have a strong economic moat.
About Hazelle
Chief trainer of The Moneyball Investors Playbook program and founder of The Joyful Investors, a financial education firm that seeks to help avid investors learn to invest better and make the journey a joyful one. I graduated with a first class honors in Bachelor of Accountancy from Nanyang Technological University (NTU) and started my auditing career in one of the Big Four. I believe that once we know how to build our wealth sustainably, we can then live our best lives ever.
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