A common mistake is to have an "eggs in one basket" obsession. How do you recognise the signs?
You often hear shrewdies encouraging their fellow investors not to "fall in love" with their shares. It's the kind of thing you read so often that it's easy to ignore the advice, but which of us hasn't been guilty of this at some point? I know I have -- and I still have a few of the old former favourites sitting at a fraction of their former value in the "sad and almost worthless" corner of my portfolio to prove it.
I also know that many well-known Foolish investors have been -- and are -- guilty of the same mistake. The problem is that your head gets turned by the latest attractive looking temptress of a company that comes along. Often, the story looks exciting and even those of us who like to think of themselves as curmudgeonly value hunters are persuaded in.
Foresight rewarded
Perhaps the company is a value play that simultaneously offers rapid growth potential. Perhaps it goes up sharply in value and your shrewdness and foresight is rewarded. But you're convinced there's a lot more to come. After all, you've done so much research that few people know more about the company's prospects than you do. You now know their customers, the detail of their contracts, their potential new business, how reasonable the CEO's salary is, how committed to achieving shareholder value the Board is, and how exciting the prospects just around the corner are are.
Why, when the rest of the investing world "inevitably" wakes up to the possibilities of this exciting little gem, then you'll have a ten-bagger on your hands and will be able to retire on the proceeds!
Love-struck
In short, you do more and more research, and every single thing you unearth about this wonderful company reaffirms your belief that it's something very special indeed. You have a private investors' tour of the site, attend the AGM, talk to the CEO regularly and are justifiably regarded as the font of knowledge across the discussion boards.
If you have quite a few shares like this in your portfolio -- great. It's very likely that you'll reap your just rewards from all the hard work, research and money you've put into the game. But if you have only one or two, watch out, you could be in love. And love is blind. It's true that you could just have the mother of all winners on your hands, but it's far more likely that you haven't.
Instead, your judgement is clouded by obsession and you've lost your objectivity. Investing is about choice and there are many other companies to choose from -- so try not to fall into the trap of only having eyes for one; forgiving the shortcomings, believing to the promises and losing sight of the bottom line valuation. Before you know it, there'll be metaphorical tumbleweeds blowing across what is today's most exciting discussion board.
Limit the research
Sometimes, you can be guilty of over-sweating the detail. This is a mistake -- particularly if you've already made a reasonably sizeable investment. Yet asking investors to back off on their research seems counter intuitive. And it is. But hugely detailed research can lead to mistakes very often as investors look for the good too much, ignoring manifold other factors.
You see so many people fall in love with shares, then continually look for the good news to make it all 'fit' in hindsight, no matter what the bottom line valuation says.
My advice is to look for the tell-tale signs in oneself. If you're continually checking the price of that one special company, dreaming about it while you're doing other things, and scanning the newsfeeds and discussion boards every day for every scrap of information you can find, then beware; you may be in love.
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