I’m going to admit it upfront. I’ve made some investment blunders over the years. Before we get into the details, please allow me to quickly introduce myself. I’m Kent Kwan, one of the co-founders of AtlasTrend and I have over 15 years of professional experience in the global investment markets. As an occupation, I’ve invested over a billion dollars in several hundred listed companies – from your run of the mill banks and miners (yes, a bit boring), through to fast-growing tech companies and even handbag makers (it was Mulberry, they make great handbags).
Through this time, the funds I’ve managed have delivered strong multi-year performance. But of course, I’ve also made and seen others make some silly investment errors along the way. The mistakes I’ve learnt most from have nothing to do with making a calculation error, or selecting the wrong company to invest in.
They were all about the wrong investing mindset, which I quickly learnt to change.
Can you relate to any of the following?
1. Don’t get too emotional about losses
I’ve always been a bit risk adverse. To this day, I’ve never sat at a gaming table at the casino and made a bet. It’s just not me because I know the pain of losing money would outweigh the joy from making money.
What might be a good mindset at the casino (not gambling) is, unfortunately, a very poor mindset for investing. In my younger days, I’d have nearly all my investments in cash deposits. Little risk of loss (though there is still risk) but of course with little return.
This was not a good investment approach because over any meaningful stretch of time, all other major investment classes (e.g. shares, property, bonds) have delivered much better investment returns than cash in the bank. The ASX produced a report on this in 2016 which you can access here.
Of course, this doesn’t mean you should put all your spare cash in the highest risk investment. However, you shouldn’t let fear of potential investment losses stop you from properly embracing investing in a well-diversified way.
Mindset Tip #1: Don’t let the potential emotional pain of investment losses cost you the opportunity for good, long-term returns.
2. Don’t invest for the short term
Warren Buffett (the world’s third wealthiest person) is recognised as one of the world’s most successful if not the most successful investor in the past 50 years. Here is what happened to the share price of Berkshire Hathaway in the year 2008 and afterward.
2008 was an extraordinarily bad year for many investors with the global financial system near collapse. Even Warren Buffett couldn’t prevent Berkshire Hathaway shareholders from losing 32% of the value of their shares. It would have been tempting for those shareholders to throw in the towel, sell everything and swear they would never invest in the share market again.
Unfortunately, any Berkshire Hathaway shareholder who sold their shares at the end of 2008 and put their money in cash instead would have missed out on the subsequent +171% returns.
Mindset Tip #2: Never invest with a short-term (less than 3 years) mindset. No one (not even Warren Buffett) can guarantee an investment gain every day, month or even year but investing with a multi-year approach means you’ll be more likely to reap the rewards of positive investment returns.
3. Don’t try to “overtime” the markets
Have you ever tried to pick the bottom or top of the share market when investing? For example, in a strong market there is always the temptation to completely hold back from investing (or even sell all your investments) until you feel like the markets are “cheap” again. However, unless you can time this with near perfection, chances are you’ll end up in a worse off position.
JPMorgan did a study a few years ago, and it showed that an investor who stayed fully invested in the US share market from 1995 to 2014 would have made a 9.8% annualised return. An investor who tried to time their investment in the market, but inadvertently missed out on being invested during the 10 best days between 1995 to 2014, would have seen their returns drop to a 6.1% annualised return.
Mindset Tip #3: Invest regularly (e.g. once a month or quarter) and you’ll be sure to avoid the temptation of trying to time the markets to your potential detriment.
4. Don’t make investing a chore
We all lead busy lives. Investing is one of those things that might fall to the bottom of the to-do list – even though it is one of the most important decisions we make.
I’ve found the best way to get engaged in investing is to make it interesting, and part of your everyday life. Are there any products and services you love using everyday or can’t live without? Are there any new,exciting things you’ve seen on your travels that you think will grow quickly?
Find out the companies that make those products and understand how they operate. Not all of them will turn out to be potential investments, but you might be surprised to learn many of them are listed companies you should consider investing in.
Mindset Tip #4: Investing is not a chore, it’s a lifelong, exciting journey that teaches you about what makes the world go round.
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You say “don’t invest for the short term” but when is the correct time to realise potential paper returns.
Is there logic to the mindset of future prospects and accumulate/reduce over time rather than realising paper profits in one trade.