Private investors have advantages and disadvantages versus institutional investors, although both face the same challenge of achieving the best returns possible.
Many institutional investors for example are largely focused on defensive stocks and yield to help achieve returns just about enough to meet (or beat) benchmarks, secure big bonuses, and promotions in the lucrative world of institutional asset management.
Private investors are free to take a little more risk in pursuit of higher returns and are unencumbered by investment guidelines, limits, and liquidity concerns. For example a private investor can take buy ideas from anywhere, whereas a professional investor on the buy side may have to take ideas from recommended research lists and answer to their investment committees.
Still for both private and institutional money managers there’s a bewildering amount of information available on which to base investment decisions.
So let’s take a look at how some retail investors commonly lose money, alongside mistakes made by retail and professional investors alike.
Following technical analysis – this is a surprisingly common mistake made by retail share investors or traders. Nearly all technical analysis is mumbo jumbo promoted by sell side brokers (Commsec, Morgans, etc) to encourage clients to trade – a lot.
Sell side brokers promote technical analysis without unaccountability safe in the knowledge that anyone dumb enough to base investment decisions on charts only has themselves to blame for their ballooning brokerage fees and capital losses.
Why does the buy-side of professional asset managers not follow technical analysis? Because they also know it’s nonsense and even asset managers managing client money want to keep trading fees as low as possible.
Following anonymous share market forums – such as those operated by ASX-listed HotCopper Holdings Ltd (ASX: HOT). In fairness HotCopper’s hotly followed list of “10 most discussed stocks” is a great list. A great list of rubbish stocks to avoid. Beware of companies focused on promotion and forecasts over financials. A recent example being GetSwift Ltd (ASX: GSW).
Worrying about politics – The Greek debt crisis, Brexit, the election of President Trump and North Korean missile firing have all led many investors to hit the sell button recently.
As Peter Lynch said more money has been lost trying to predict corrections, than in the actual corrections themselves.
It’s better to focus on companies and economies then political risks like North Korea that tend to get magnified by the 24-hour news cycle. Just about any wildcard could be president of the U.S. and its share market would still go up if economic growth is strong. Just look at the past year.
Selling winners – this is a common mistake and one of the worst as it’s often the most expensive. I’ve been guilty of selling holdings in the a2 Milk Company Ltd(ASX: A2M) and Altium Limited (ASX: ALU) recently in the belief they were overvalued.
Remember share prices reflect expectations of future performance, which on the flip side means historical price action is largely meaningless.
The serious money in share markets is nearly always made by the patient who are prepared to hold winning stocks over 5, 10, or 20-year periods and ride out volatility.
Holding losers – it’s easy to make a mistake investing, but not recognising it is the costly part. Cutting your losses early when a company’s performance takes a permanent downturn is not easy, but will dramatically improve your investing returns.
I blundered in riding Vocus Group Ltd (ASX: VOC) shares all the way to the bottom pretty much. Despite the red flags around insider selling, excess debt, missed forecasts, underperforming acquisitions and some diabolical performances from management teams on earnings calls I failed to hit the sell button early enough. I’ve now divested around 80% of my holdings and expect Vocus could head lower.
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