Personal Finance: Mistakes for Fools to avoid

The eighth of our extracts from Motley Fool, the best-selling investment guide

The Motley Fool started in the US as an investment newsletter and has grown to a $10m internet and publishing business. At the heart of its philosophy is the belief that anyone can run their own finances and make better decisions than the so-called experts. The name comes from the wise Fools at the English court, who dared to question the king. Those who follow the Motley Fool's advice are Foolish investors.

This week: the 10 most common investing mistakes.

1. Buying what you don't understand

The point here is to take things slowly. Read Investors Chronicle, the Financial Times and the daily papers. Visit the Motley Fool website and see what other investors have to say (www.fool.co.uk). Phone for the latest company reports and run them past your investment club, mother or work colleagues for further insights.

This sort of approach and deliberation will benefit you as an investor; it's the direct opposite of what most people do, which is to rush to act quickly on the recommendations of others. You're responsible for your investments.

2. Focusing on short-term performance

What your portfolio does in the coming week is several orders of magnitude less important than what it does between the years 2005 and 2010, or better yet 2015 and 2020. To buy and sell shares on the back of short-term market fluctuation will mortally wound your wallet. The trading commissions will eat into your profit and you'll become one of those sad souls who dances to the tune of a share pager that bleeps whenever your chosen shares move more than a specified amount.

3. Finding you become enduringly bearish

Bears think the glass is half empty and bulls think it is half full. Moderation, the middle way, is something the long-term investor can't live without. There is, you see, no "right time" to invest, no point at which the economic signs, the market sentiment and the pattern of goose entrails all come together to give you a green light.

You can never be a "perfect parent", only a "good enough parent" and so it is with investing. No one, not even Warren Buffett, can invest without regrets. Repeat to yourself the Foolish mantra: since 1918 the London Stock Exchange has returned 12.2 per cent on average every year. It has, on average, doubled investors' returns every six years. Just have faith that you don't have to get it perfectly right or perfectly timed to come out at the other end clutching a profit.

4. Believing the financial press is expert

What sells newspapers and gains television viewers? Is it a dedication to your long-term enrichment? No. Controversy and disaster are what sells in the media business.

The editing process is heavily biased in favour of matters catastrophic. Private investors have quietly and methodically grown their savings for decades. However, this isn't half as exciting as the next market collapse, so it does not make the headlines.

5. Concentrating on share prices

Novice investors often have a preoccupation with share prices. Our first inclination is to believe that a share trading for 150p is less expensive and holds greater potential for reward than one trading at 1,500p a share. Sounds reasonable, but unfortunately this principle doesn't hold on the stock market. A share price in itself is meaningless.

The total value of a company equals the number of shares times the price of those shares. So if Alan's Aardvark Adventures Plc has 100 million shares each priced at 150p, the company is valued at pounds 150m (150p x 100 million=pounds 150m). And Ethelred's Elephant Enterprises Plc, with 5 million shares trading at 1,500p a share, is priced at pounds 75m.

Don't bother with the daily to-ing and fro-ing of share pricing and you will naturally bear down more rigorously on the businesses you are buying.

6. Buying penny shares

Penny shares can seriously damage your wealth. The term refers to shares whose price can be measured in multiples of just a few pence and whose market capitalisation can usually be measured in a few million pounds. When companies go public, they often don't do so with an initial share price measured in multiples of just a few pence. Companies whose shares trade for pennies have often earned their way to the bottom of the heap.

Newsletters purport to guide the novice investor to stunning profits by offering tips on which penny shares to buy. If it were so simple, we would not be writing this book.

At the Motley Fool website, we consider a company as an investment prospect if it has a share price greater than 50p and a market capitalisation greater than pounds 30m.

7. Not tracking your investment returns

Tracking the performance of your investments is easier than ever, with the internet and a variety of software packages available. By typing in your positions and updating them each month or each quarter, you can distinguish between market-beating, market-meeting and underperforming.

Not knowing how your investments are performing over the years in relation to the FT-SE index is somewhat akin to not knowing how your favourite football team is doing, or how your children are doing at school.

8. Not diversifying your portfolio

Our recommendation is that portfolios of pounds 10,000 never have more than 15 per cent of their capital initially invested in any one share. From there, we recommend you think about lightening any positions that grow to become more than 25 per cent of your total portfolio. To have too much of your money tied up in too few shares is to ask for a come-uppance.

9. Not being online

Investors across the world can tap into a network of resources on the internet that dramatically exceeds the amount of information available via any other medium.

As consumers band together and negotiate with the big boys on a far more level playing field, the balance of financial power is shifting. If you can access the internet, you should give some financial sites a whirl. Rather than learning by passively reading, the best sites (including Motley Fool) allow you to learn through co-operative endeavour.

10. Spending far too much time on investing

It seems only right that we close our investing dos and don'ts with a recognition that many of us fall into the trap of dedicating too much time to money management. Studying businesses, becoming a part-owner of enterprises through shares, and talking about your smartest and dumbest investments is actually a great deal of fun.

But captivating as the market can be, it does not take the place of living.

Extracted from the 'Motley Fool Investment Guide' by David Berger with David and Tom Gardner, published by Boxtree at pounds 12.99. David Berger, David and Tom Gardner 1998. To order a copy with free postage call 0181- 324 5522.

Next week: investing abroad and ethical investment.

Start your day with The Independent, sign up for daily news emails
Arts and Entertainment
Joe Cocker performing on the Stravinski hall stage during the Montreux Jazz Festival, in Montreux, Switzerland in 2002
musicHe 'turned my song into an anthem', says former Beatle
News
Clarke Carlisle
sport
Sport
footballStoke City vs Chelsea match report
Arts and Entertainment
theatreThe US stars who've taken to UK panto, from Hasselhoff to Hall
PROMOTED VIDEO
ebooks
ebooksA year of political gossip, levity and intrigue from the sharpest pen in Westminster
Life and Style
Approaching sale shopping in a smart way means that you’ll get the most out of your money
life + styleSales shopping tips and tricks from the experts
News
newsIt was due to be auctioned off for charity
News
Coca-Cola has become one of the largest companies in the world to push staff towards switching off their voicemails, in a move intended to streamline operations and boost productivity
peopleCoca-Cola staff urged to switch it off to boost productivity
Environment
Sir David Attenborough
environment... as well as a plant and a spider
Voices
'That's the legal bit done. Now on to the ceremony!'
voicesThe fight for marriage equality isn't over yet, says Siobhan Fenton
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

The Jenrick Group: Night Shift Operations Manager

£43500 per annum + pension + holidays: The Jenrick Group: Night Shift Operatio...

SThree: Trainee Recruitment Consultant - LONDON

£20000 - £25000 per annum + OTE £40,000 + Car + Pension: SThree: SThree are a ...

SThree: Trainee Recruitment Consultant

£20000 - £25000 per annum + OTE £35K: SThree: We consistently strive to be the...

SThree: Graduate Recruitment Consultant

£20000 - £25000 per annum + OTE £35000: SThree: SThree are a global FTSE 250 b...

Day In a Page

Surrounded by high-rise flats is a little house filled with Lebanon’s history - clocks, rifles, frogmen’s uniforms and colonial helmets

Clocks, rifles, swords, frogmen’s uniforms

Surrounded by high-rise flats is a little house filled with Lebanon’s history
Return to Gaza: Four months on, the wounds left by Israel's bombardment have not yet healed

Four months after the bombardment, Gaza’s wounds are yet to heal

Kim Sengupta is reunited with a man whose plight mirrors the suffering of the Palestinian people
Gastric surgery: Is it really the answer to the UK's obesity epidemic?

Is gastric surgery really the answer to the UK's obesity epidemic?

Critics argue that it’s crazy to operate on healthy people just to stop them eating
Homeless Veterans appeal: Christmas charity auction Part 2 - now LIVE

Homeless Veterans appeal: Christmas charity auction

Bid on original art, or trips of a lifetime to Africa or the 'Corrie' set, and help Homeless Veterans
Pantomime rings the changes to welcome autistic theatre-goers

Autism-friendly theatre

Pantomime leads the pack in quest to welcome all
The week Hollywood got scared and had to grow up a bit

The week Hollywood got scared and had to grow up a bit

Sony suffered a chorus of disapproval after it withdrew 'The Interview', but it's not too late for it to take a stand, says Joan Smith
From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?

Panto dames: before and after

From Widow Twankey to Mother Goose, how do the men who play panto dames get themselves ready for the performance of a lifetime?
Thirties murder mystery novel is surprise runaway Christmas hit

Thirties murder mystery novel is surprise runaway Christmas hit

Booksellers say readers are turning away from dark modern thrillers and back to the golden age of crime writing
Anne-Marie Huby: 'Charities deserve the best,' says founder of JustGiving

Anne-Marie Huby: 'Charities deserve the best'

Ten million of us have used the JustGiving website to donate to good causes. Its co-founder says that being dynamic is as important as being kind
The botanist who hunts for giant trees at Kew Gardens

The man who hunts giants

A Kew Gardens botanist has found 25 new large tree species - and he's sure there are more out there
The 12 ways of Christmas: Spare a thought for those who will be working to keep others safe during the festive season

The 12 ways of Christmas

We speak to a dozen people who will be working to keep others safe, happy and healthy over the holidays
Birdwatching men have a lot in common with their feathered friends, new study shows

The male exhibits strange behaviour

A new study shows that birdwatching men have a lot in common with their feathered friends...
Diaries of Evelyn Waugh, Virginia Woolf and Noël Coward reveal how they coped with the December blues

Famous diaries: Christmas week in history

Noël Coward parties into the night, Alan Clark bemoans the cost of servants, Evelyn Waugh ponders his drinking…
From noble to narky, the fall of the open letter

From noble to narky, the fall of the open letter

The great tradition of St Paul and Zola reached its nadir with a hungry worker's rant to Russell Brand, says DJ Taylor
A Christmas ghost story by Alison Moore: A prodigal daughter has a breakthrough

A Christmas ghost story by Alison Moore

The story was published earlier this month in 'Poor Souls' Light: Seven Curious Tales'