Who is selling the shares you need to buy and is buying what you need to sell? The investing loser. Find out how to spot one so you'll never be one.
Here are seven investing habits you should avoid.
Habit 1 -- Overtrading
Like the ham fisted carpenter who keeps cutting bits off his table legs, the stockmarket loser will soon find himself on his knees if he continually changes his holding in an effort to improve his portfolio. A study by Terrance Odean of 60,000 online traders found that the slackers did 6% better per annum than the most active traders.
Habit 2 -- Overconfidence
The great majority of drivers are above average. This isn't one of those mean vs median statistical paradoxes but what happens when people rate themselves.
Half of the population has better confidence in its investing powers. Let's call this half 'men'. It turns out that 'men' regularly do worse than average and non-'men' do better. A gender reassignment procedure is unlikely to help.
The overconfident investor will buy too much of a sure thing, take big risks that he thinks are small risks and indulge in plenty of Habit 1.
Habit 3 -- Following the action
"Because it's there" is the reason George Mallory gave in 1924 for climbing Everest. "Because it's going up" has equal pull to stockmarket losers who will also bail out of shares just because they are falling even though there's no news to change the fundamental value of the company.
The loser will also buy on the latest news story, technical innovation and in the hottest sectors giving far too much weight to prominent and recent factors. Some hot shares for losers this year have been Yoomedia
(LSE: YOO)
, Monstermob
(LSE: MOB)
and Partygaming
(LSE: PRTY)
.
Habit 4 -- Belief in efficient markets
A columnist on a national newspaper said that if there's one lesson she'd learnt from the dotcom boom and bust, it was that a great company is worth any price. I couldn't read the rest of the article as it was obscured by coughed-up cornflakes.
If you buy without having an idea of fair value you may as well try to hang glide over the Channel. If there's a really strong updraught you might make it to France but you are more likely to have to hitch a ride back on a submarine.
Habit 5 -- Buying on newspaper tips
If Anthony Bolton, Peter Lynch and Warren Buffet co-wrote a column and only tipped one share a year then I'd give it serious consideration. Otherwise just take newspaper tips as starting points for your own research. Most financial journalists are not experienced market beaters and work under the yoke of up to three tips a day.
Habit 6 -- Selling too soon
Most of my gains have come from shares that have risen two and threefold as profits grew or recovered and the market came to recognise a success story. Losers see a ten or twenty percent gain and run for the exit but this doesn't compensate for the losses in their portfolios.
The loser certainly wouldn't have held Cairn Energy
(LSE: CNE)
from 300p five years ago to 1900p now.
Habit 7 -- Holding losers
Losers hold losers. They are optimistic. They hate to admit they are wrong.
UK guru Jim Slater says you should always sell at the first sign of trouble. The reason is twofold: directors don't like to say "we messed up" and will serve up bad news like a short-staffed French restaurant -- slowly and in small portions. Secondly there's truth in the adage that profit warnings come in threes. Business problems are like verrucas -- they grow underfoot and unseen, then take a lot of treatment to get rid of.
A losing company isn't the same as a falling share price. If your share has dived don't follow loser's Habit 3. Have a ferret round to find out why it's fallen. If it turns up clean, hold it tight. I'd have sold many of my three baggers at a loss if I'd lost my nerve simply because they were underwater.
More:What I Know About How You Invest, The Cost Of Portfolio Turnover, The Common Mental Mistakes Investors Make
