Investment Mistake Tip #7: Don’t Place Excessive Trust in “Experts”
Everybody has a conflict of interest with your wealth except you.
Investment institutions manage your money so they can charge fees, and financial advisors sell you products so they can earn commissions.
Similarly, the investment media seeks to maximize subscription and advertising revenue thus biasing editorial policy toward sizzle that sells rather than substance that serves.
The bottom line is your investment advice is coming from sources whose business objectives are focused on their wealth. Not yours.
Don’t make the mistake of trusting the experts. You should always operate from the assumption that the investment advice you receive is biased.
“An economist is an expert who will know tomorrow why the things he predicted yesterday didn’t happen today.”– Laurence J. Peter
To understand how bias creeps into your investment advice, simply look at how the source’s pockets are lined. Know that where they stand limits what they see. We all have biases. That includes you and me.
With that said, I also believe there are many well intentioned, honest, good people doing their absolute best to work with the limited knowledge and conflicting data that make up the investment world.
Most “experts” are confused by investing just like you, or if they’re confident, it’s because they’re blind to the humbling reality that the essence of investing is putting capital at risk into an unknowable future. Outcomes are always probabilistic at best because the future will always be unpredictable. Nobody ever truly knows what will happen, including the experts.
The result is you should never mistake professional opinions for fact just because they carry an air of expertise or come from a large institution.
Most experts are trained in a specific school of thought and don’t see outside of it.
There’s no single investment truth and anyone claiming to have it is proving that they don’t.
When you learn that there are many shapes and dimensions to the complexity of investment truth and stop believing the supposed experts, your healthy skepticism will bring you closer to consistent profit.
Investment Mistake Tip #8: Beware of Low Liquidity
A liquid investment is something that can readily be converted into cash, and an illiquid investment is something with barriers that keep it from being converted to cash.
Examples of liquid investments include United States Government Bonds and large, listed corporate stocks. liquid investments include some partnership interests, thinly traded stocks, and most real estate.
Looking back over my investment career, nearly all of my major losses and financial setbacks can be attributed to loss of liquidity.
The reason is simple: your ultimate risk management tool is to exit the investment to control losses, but inadequate liquidity can lock you into an investment causing losses to grow to unacceptable levels.
Never make the mistake of accepting low liquidity unless the potential reward is so great as to merit the additional risk.
Only give up liquidity when you have other risk management disciplines to control risk of loss for this investment.
Investment Mistake Tip #9: Beware of Excessive Conservatism or Risk Taking
The essence of the investment game is balancing risk with reward, and the better you get at risk management, the more reward you can pursue.
The high-flying tech stock or new issue investor is making the same mistake as the guy who solely invests in C.D.’s, U.S. Treasury bills, or bonds.
They’re polar opposites of the same extreme thinking because neither has balanced risk with reward to maximize his long-term wealth.
Remember, a ship may be safest sitting in harbor, but that’s not what ships were built for. Similarly, it’s reckless to take a ship out of harbor when the “perfect storm” strikes.
You should invest aggressively when the reward merits the risk, and conserve capital by hiding in the safe harbor of cash equivalents when risk is excessive.
Always have an exit point for every investment so you can preserve capital when the perfect storm strikes.
Investment Mistake Tip #10: Don’t Confuse Brains with a Bull Market
A rising tide lifts all boats. When the tide goes out is when you see who is standing naked in the water.
Don’t mistake brains with a bull market just because you happen to be in the right place at the right time and made some good money through sheer luck.
“A smooth sea never made a skilled mariner.”– English Proverb
The ability to conserve capital and even prosper when underlying market conditions are adverse is where you separate the novice from the skilled investor.
That means having a risk management discipline to manage losses to an acceptable level.
Investment results should only be viewed over the course of an entire market cycle because short-term results in one-way markets can lead to false conclusions.
Investment Mistake Tip #11: Don’t Confuse Total Return with Value Added
When measuring investment results, don’t make the mistake of looking solely at how much money you made.
The reason is because total return is a composite of market return, style return, and management skill. Looking at total return without separating the source of the return will cause false conclusions.
The real measure of investment skill is value added return, and that’s determined by comparing total returns against an appropriate benchmark index over a full economic cycle. By doing this, you isolate style and market returns from management skill.
For example, a growth stock manager with annual compound returns of 25% could be a dud or a rock-star depending on whether the benchmark growth stock index gained 32% (value lost -7%) or lost 3% (value added +28%) over the same time period.
Conversely, your investment style might be inherently bull-biased to where you do well in risking markets but lose horribly in declining markets.
Performance over the full market cycle relative to an appropriate benchmark is how you determine investment skill and value added.
Investment Mistake Tip #12: Don’t Focus Excessively on Expenses or Taxes
“The avoidance of taxes is the only intellectual pursuit that carries any reward.”– John Maynard Keynes
Don’t make the mistake of never selling an investment because you don’t want to pay taxes or fees. Conversely, you also shouldn’t ignore the tax consequences.
Taxes and fees are just one factor (transaction expenses) to consider when analyzing how a transaction will impact overall portfolio performance.
Other factors to consider, which may take priority over tax and expense concerns, include risk control, asset allocation, expected reward, and many others.
The objective of investing is to maximize profits for any level of risk, with taxes and fees being only one component to that equation.
Whether or not you should pay taxes and fees by making a transaction will depend on how the transaction is expected to impact investment performance net of fees and taxes.
For example, many people thought I was nuts to sell my entire investment real estate portfolio in 2006 and pay a horrendous tax bill on the gains. By 2009, those same people realized the taxes paid were nothing compared to the losses and headaches avoided.
Oversimplifying the decision by looking at just one factor (transaction expenses) can lead to expensive mistakes. Balance is the key.
Bonus Tip #13 (Extra Bonus): Have Fun Investing
Have fun investing because wealth isn’t a destination to be reached, but a journey to be enjoyed. It’s a lifelong process that doesn’t end until you’re six feet under ground, so you might as well figure out how to enjoy the experience along the way.
Many people view investing as a chore. They labor over the numbers, get confused, and worry. Their investment results typically reflect this lack of enthusiasm.
I view the investment game as a big treasure hunt. It’s like playing Monopoly for adults with real, live money where you get to make your own rules.
It’s an adventure that’s mentally stimulating and creates endless opportunities for personal growth while enhancing the quality of my life.
“We struggle with the complexities and avoid the simplicities.”– Norman Vincent Peale
The truth is that neither attitude is right or wrong, but one takes you toward financial success and the other moves you away. Which would you rather have: fun or frustration?
The choice is yours…
In summary, it’s a lot easier to enjoy the investment process when you learn how to avoid committing some of the most common and expensive investment mistakes.
Making money is more enjoyable than losing it.
Steering clear of just one of these deadly dozen investment mistakes can literally make the difference between wealth and poverty.
Direct experience has taught me each one of these investment mistakes the hard way, and I share them with you here in the hope you can take a less expensive route to the same knowledge.