Personal Finance: Mistakes for Fools to avoid
The eighth of our extracts from Motley Fool, the best-selling investment guide
Sunday 13 December 1998
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.
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