- Mistake #1: Trying to Control Things You Can’t
The short list is: Save; Invest; Allocate your assets appropriately; Minimize costs; and Avoid taxes. The article spells them out in more detail and is worth reading.The illusion of control can lead to overconfidence. Overconfidence can lead to overtrading. Overtrading will almost inevitably leave you short of meeting your goals.
While I could go on forever enumerating the things that we cannot influence, the list of those things we can control as investors is much shorter. The most meaningful levers we can pull to affect our investment outcomes are as follows. - Mistake #2: Recency Bias
Stocks have been marching higher for the better part of a decade, so surely they’ll only continue to climb...right?
Recency bias can become particularly dangerous in bear markets. Falling stock prices can lead to panic selling, and shellshocked investors can be slow to get back in once markets rebound. There’s plenty of evidence that the psychological effects of the global financial crisis linger with investors to this day, as many of them have remained on the sidelines for much of the ensuing recovery. - Mistake #3: Paying Too Much Attention
Our most meaningful investment milestones are decades away, but our attention is monopolized by the moment. Paying too much attention to our investments today can put us at risk of missing goals that are years away.
Three Investing Mistakes to Avoid
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Three Investing Mistakes to Avoid
Lots of common sense in 3 Investing Mistakes to Avoid | Morningstar
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Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
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Re: Three Investing Mistakes to Avoid
Another triplet, Three Lessons for Investors in Turbulent Markets - Bloomberg
- Long periods of market calm create the technical conditions for violent air pockets.an important determinant was the conditioning of the investor base to believe that every dip had become a buying opportunity, a simple investment strategy that had proven very remunerative for the last few years.
The more investors believed, the greater the willingness to "buy the dip." Over time, the frequency, duration and severity of the dips diminished significantly. That reinforced the behavior further.
The economist Hyman Minsky had a lot to say about the phenomenon of prolonged stability breeding complacency as a precursor to instability. - Crowded trades can be a lot more unstable than most investors expect.John Maynard Keynes' observation proved correct: "Worldly wisdom teaches that it is better for reputation to fail conventionally than to succeed unconventionally."
Under such conditions, it should come as no surprise that the unwinding of crowded trades can be extremely unsettling for markets as whole. - During market turmoil, investor differentiation gives way to indiscriminate action.As explained by the "market for lemons" theory put forward by George Akerlof, and by the work of Nobel Laureates Michael Spence and Joseph Stiglitz, it becomes very difficult to signal "quality" when the context is extremely noisy and volatility is unsettling. In violent market selloffs, even solid names get treated as "lemons" initially.
Based on what I've read on FWF over the years, my only concern here might be #2, IMHO the "dividend growth" strategy seems awfully crowded and with interest rates rising and the need to "reach for yield" decreasing, there might be some who have been swimming naked and overly dependent on this segment of the market.All three of these lessons are relevant to the recent market movements, which have been technically driven, and not by economic and corporate fundamentals. Indeed, these gyrations occurred in the context of improving, and not deteriorating fundamentals.
<snip>
The market turmoil will likely lead to a healthier resetting of investor conditioning and, one hopes, greater respect for volatility and the importance of proper pricing of liquidity. After all, as Warren Buffett observed, "Only when the tide goes out do you discover who's been swimming naked."
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Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
Re: Three Investing Mistakes to Avoid
Regarding your first 3, I take a certain amount of pride in not being fussed at all about the first two. I am guilty of #3, paying too much attention, but for the most part, I mostly look and absorb and do nothing about it. I still have a pretty good fix on the vision for the indefinite future and because I never use a spreadsheet on anything, I don't get caught up in the trees.
I also believe the dividend growth strategy had become a very crowded place. I expect dividend stocks, especially from those with leveraged balance sheets, will underperform the overall market for some time to come. I need to start paying more attention to D/E and D/EBITDA ratios and dispose of a few here and there.
I also believe the dividend growth strategy had become a very crowded place. I expect dividend stocks, especially from those with leveraged balance sheets, will underperform the overall market for some time to come. I need to start paying more attention to D/E and D/EBITDA ratios and dispose of a few here and there.
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Re: Three Investing Mistakes to Avoid
Thanks P_I! These articles stimulate some critical thinking and self-examination. I must admit that I was guilty of most of these in my early investing career in the 80s. In the 90s, I discovered many of these on my own as I took a methodical approach. Unlike AR, I used spreadsheets extensively in those days. I learned to use gurus as guides to find leads for stock to analyze. But that subsequent analysis revealed the fraud that many were guilty of.
I did look at my portfolio on Monday night and discovered I was down 3x Honda Accords. Like ghariton, I treated it like a headache. This too shall pass. (I just checked again and it is only down $5k from the peak.)
I am still expecting a true correction. But maybe there has been a structural change?
I did look at my portfolio on Monday night and discovered I was down 3x Honda Accords. Like ghariton, I treated it like a headache. This too shall pass. (I just checked again and it is only down $5k from the peak.)
I am still expecting a true correction. But maybe there has been a structural change?
For the fun of it...Keith
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Re: Three Investing Mistakes to Avoid
Just for the record, what does an Accord go for these days?
IIRC, the previous measure was Honda Civics, but I suppose we have to account for inflation...
IIRC, the previous measure was Honda Civics, but I suppose we have to account for inflation...
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
Thomas Babington Macaulay in 1830
Re: Three Investing Mistakes to Avoid
Yes, I was down many Accords. Doesn’t bother me much, reminds me that I am quite well off. Ie must have a lot if you can lose that much.
Re: Three Investing Mistakes to Avoid
You have to put it in context. Were you down from the high, from the first of the year, from a year ago or from you ACB?
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard
Re: Three Investing Mistakes to Avoid
All but my ACB and a year ago. I suspect I will be back to my high in a month or three.
Re: Three Investing Mistakes to Avoid
2010
Civics were $25,000
Accords were $30,000
Pilots were $50,000
You can only lose a maximum of 8 Honda Civics then you have to switch to Honda Accords.
2018
Accords are $40,000
Don't know about Civics or Pilots at the moment but will investigate.
Early 2016 I was down 5 Honda Accords so only down 2 at the moment but if it gets to 10 will have to change to Honda Pilots.
I calculate down from my embedded capital gains if it gets to 10 Honda Pilots might liquidate and go full couch potato.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Re: Three Investing Mistakes to Avoid
Yes I thought it would be nice to use round numbers. And for sure the numbers are inflated from the days of Civics.
For the fun of it...Keith
Re: Three Investing Mistakes to Avoid
As we have previously discussed, if thinking of losses in terms of certain types of cars makes the impact seem more significant, it’s not a good thing to do. Makes you more worried and more likely to do something stupid.
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Re: Three Investing Mistakes to Avoid
I was always fuming at kids spurging more than needed on the new Mini Cooper. I said buy a Corolla and 100 shares of Ry + same prices then of a Mini. Wait ten years and the next car is free other than CRA drilling you for a taste.
(Defining kids as sub 30years at that point, moving target, I'm starting to think 40 year old's lack experience now too)
(Defining kids as sub 30years at that point, moving target, I'm starting to think 40 year old's lack experience now too)
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Re: Three Investing Mistakes to Avoid
Actually, measuring the losses in something as pedestrian as a family car downplays the significance to me. So far it has been ho-hum.
We're all going to make mistakes. I have started to pick away at things a bit too early of course which has always been my MO, but if you don't pick away at some point, you run the risk of standing aside completely which in my mind is a more egregious offence in the grand scheme of things. Still, I'm trying to be a better student this time around and taking George's sage words to heart that when I feel like doing something, I lie down until the feeling goes away. It won't stop me completely, but it might just reign in some of the unnecessary trading I engaged in during previous bear markets.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
Thomas Babington Macaulay in 1830
Re: Three Investing Mistakes to Avoid
"Even stupid people get old"Profit not Prophet wrote: ↑09 Feb 2018 09:07 (Defining kids as sub 30years at that point, moving target, I'm starting to think 40 year old's lack experience now too)
Lots of baby boomers living hand to mouth. I'd say the only sensible generation got that way by living through a World War.
Re: Three Investing Mistakes to Avoid
Cars are usually contrasted to pedestrians!
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“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
Re: Three Investing Mistakes to Avoid
Everybody is different but I would have thought defining your losses as a fairly nice car might make it seem more significant to some people?
Re: Three Investing Mistakes to Avoid
If you think a Honda Accord is pedestrian you may be out of touch with the financial reality of 90% of Canadians. My guess is most would wish they could go out and be reasonably happy with affordable payments on such a car never mind buying a few of them outright. We are very lucky and privileged few on here.Actually, measuring the losses in something as pedestrian as a family car downplays the significance to me. So far it has been ho-hum.
Hiding behind percentages or not opening financial statements to me signals that your equity allocation is to high. If reality bites a lower equity allocation maybe should be considered.
Last edited by BRIAN5000 on 09 Feb 2018 15:54, edited 1 time in total.
This information is believed to be from reliable sources but may include rumor and speculation. Accuracy is not guaranteed
Re: Three Investing Mistakes to Avoid
Depending on how far down these markets go, it might be that opportunity to simplify/reduce holdings without incurring as much cap gains taxes. Think I will look at this possibility once I return home. Will try to wait for the bottom this time.scomac wrote: ↑09 Feb 2018 09:23 We're all going to make mistakes. I have started to pick away at things a bit too early of course which has always been my MO, but if you don't pick away at some point, you run the risk of standing aside completely which in my mind is a more egregious offence in the grand scheme of things. Still, I'm trying to be a better student this time around and taking George's sage words to heart that when I feel like doing something, I lie down until the feeling goes away. It won't stop me completely, but it might just reign in some of the unnecessary trading I engaged in during previous bear markets.
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Re: Three Investing Mistakes to Avoid
[quote=BRIAN5000 post_id=609038 time=1518201545 user_id=1915]
[quote]
Hiding behind percentages or not opening financial statements to me signals that your equity allocation is to high. If reality bites a lower equity allocation maybe should be considered.
So what is the best way to do it? One day last week I lost high 6 digits. Wasn’t happy but not worried at all. Lots of Accords. Didn’t hide, checked my account every hour. But slept fine. I figure if you lived through 2008-2009......
[quote]
Hiding behind percentages or not opening financial statements to me signals that your equity allocation is to high. If reality bites a lower equity allocation maybe should be considered.
So what is the best way to do it? One day last week I lost high 6 digits. Wasn’t happy but not worried at all. Lots of Accords. Didn’t hide, checked my account every hour. But slept fine. I figure if you lived through 2008-2009......
Re: Three Investing Mistakes to Avoid
It depends on what a person is invested in and how they go about the process. Since you guys like the Accords, we'll use that yardstick. Uncle Warren is down somewhere between 250,000 and 300,000 Accords this week. Too bad he never cashed out lat week and bought very man woman and child in Omaha a Kia before the market decline. Don't be silly you say. Ok, but you people started it by using a made up metric that more resembles a poker table humble-brag than anything useful which is what I think scomac was getting at.
Show me the incentive and I will show you the outcome
--Charlie Munger
--Charlie Munger
Re: Three Investing Mistakes to Avoid
Yes that is why I use the "pedestrian Accord". If I used BMW convertibles, I might feel the effects more. Plus I hope I do not experience many multiple BMW declines!
For the fun of it...Keith
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Re: Three Investing Mistakes to Avoid
The focus of quantifying losses, particularly paper losses, in this manner seems to be common on FWF. I would suggest that this type of mental accounting is an example of loss aversion, specifically myopic loss aversion (MLA).
I don't see any value in doing this calculation, either in absolute dollars or Civics, Accords, BMWs, etc. Markets move up and down and if you get fixated on short-term downward movements that have been happening recently, it would seem to me that you are falling victim toMyopic loss aversion occurs when investors take a view of their investments that is strongly focused on the short term, leading them to react too negatively to recent losses, which may be at the expense of long-term benefits (Thaler et al., 1997). This phenomenon is influenced by narrow framing, which is the result of investors considering specific investments (e.g. an individual stock or a trade) without taking into account the bigger picture (e.g. a portfolio as a whole or a sequence of trades over time) (Kahneman & Lovallo, 1993).
Speaking of that,Peculiar_Investor wrote: ↑07 Feb 2018 22:21 Mistake #3: Paying Too Much AttentionOur most meaningful investment milestones are decades away, but our attention is monopolized by the moment. Paying too much attention to our investments today can put us at risk of missing goals that are years away.
I'm also guilty with somewhat the same explanation on this point. During the winter months (i.e. non-golf season), I pay way too much attention and do have a portfolio tracking spreadsheet that I keep running/auto-updating during market hours. My explanation part is I'm very disciplined to only look and not act on the noise, or is it information? Being actively involved in financial forums like FWF and the Bogleheads forum probably also means you are paying too much attention, but to me the discussions and dialog are absolutely worth paying attention to for their education value and improving my knowledge as an investor.AltaRed wrote: ↑07 Feb 2018 23:57 I am guilty of #3, paying too much attention, but for the most part, I mostly look and absorb and do nothing about it. I still have a pretty good fix on the vision for the indefinite future and because I never use a spreadsheet on anything, I don't get caught up in the trees.
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Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
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- scomac
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Re: Three Investing Mistakes to Avoid
Has paying attention hurt Warren Buffett? It's what you do with the information that counts.
It all comes down to what side of the argument you want to support. Behavioral Finance doctrine would have us all passively investing in the total market and looking only once annually in order to do our rebalancing. That has worked marvelously in western economies, but not so much in other parts of the world as has been alluded to elsewhere. It's almost as if a number of these articles talk down to the reader as if they are naive to the world of investing. I suppose we can't blame them for that because that is likely reflective of the vast majority of society.
It all comes down to what side of the argument you want to support. Behavioral Finance doctrine would have us all passively investing in the total market and looking only once annually in order to do our rebalancing. That has worked marvelously in western economies, but not so much in other parts of the world as has been alluded to elsewhere. It's almost as if a number of these articles talk down to the reader as if they are naive to the world of investing. I suppose we can't blame them for that because that is likely reflective of the vast majority of society.
"On what principle is it, that when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"
Thomas Babington Macaulay in 1830
Thomas Babington Macaulay in 1830
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Re: Three Investing Mistakes to Avoid
I think there is a big difference between Warren Buffett and your average FWF'er. Buffett's full time job is running an investment management company, so I'd hope he's paying very close attention.
What's interesting in his approach is how he pays attention. He's old school, reading archaic things like company financial statements and regulatory filings. Without intending to pick on any FWF'ers but using a recent topic of discussion as an example, Buffett doesn't rely on websites to provide P/E ratios or other similar investing metrics. He calculates them himself, using the original source of information, company filings. It has been said that one of his advantages is being located in Omaha, far from the noise of Wall Street.
Ultimately it comes down to what is the focus of your attention. For the retail investor, too often that's whatever is the news du jour on websites and/or on the likes of BNN/CNN/CNBC. That's the noisy part that can and should be ignored.
I'm not sure I would give it that interpretation. Behaviour Finance to me is more about being aware of your internal biases, such as myopic loss aversion, so that you can overcome them. I wouldn't stretch Behaviour Finance to suggest that we all passively invest in the total market, that's supported by other theory.It all comes down to what side of the argument you want to support. Behavioral Finance doctrine would have us all passively investing in the total market and looking only once annually in order to do our rebalancing.
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Normal people… believe that if it ain’t broke, don’t fix it. Engineers believe that if it ain’t broke, it doesn’t have enough features yet. – Scott Adams
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Re: Three Investing Mistakes to Avoid
So it's not that we pay too much attention, but that we pay attention to the wrong things.
"And the days that I keep my gratitude higher than my expectations, well, I have really good days" RW Hubbard