A key maxim of successful investing is this: Avoid making major mistakes. We’re all bound to make some mistakes, but hopefully, they’re not terribly costly ones. A few years ago, we asked SMI members to step forward and admit to the group, “This was my biggest mistake.” Looking back on their years of investing experience, what did they do — or not do — that they now regard as a major error? (You can read some of what they told us in our August 2020 Cover article. )
In the interest of fair play, let me tell you the story of one of my biggest blunders. It was in 1999 during the dot.com mania. I watched with amazement as some tech stocks rose to breathtaking price levels even though they had no earnings — and no hope of having any earnings for several years. Some companies that did have earnings — no matter how minuscule — had P/E ratios that went to 200, then 300, then 400, and more. It was insane.
I decided to cash in on the insanity by selling short two of the dot.com high flyers, profiting when the inevitable bursting of the bubble took place. (Short selling is an advanced investing technique that creates the opportunity to profit from a price decline.) Unfortunately, I didn’t put a plan in place. I was so sure that “they just couldn’t keep going higher” that I didn’t bother with “stop losses” or any of the other aspects of a plan that I regularly apply elsewhere.
I was way wrong. The stock prices did keep going higher. I was overly confident, not knowing at the time that the limits of the mania were more elastic than I had ever imagined. Finally, I couldn’t take it anymore and got out. (To add insult to injury, tech stocks peaked the next week and began the inevitable decline for which I had been waiting. It almost seems as if the market taunts us sometimes, doesn’t it?)
The losses I suffered weren’t devastating, but they were painful, embarrassing, and much more than they would have been if I had followed my usual guidelines. My analysis was correct; my timing — driven by my emotions — was terrible. If I had had the courage of my convictions and hung in there, I would have cleaned up over the next year as the tech crash unfolded. Lesson: When you enter an investment, always have a specific plan in place that will trigger your exit. No exceptions. Even when you know you’re right. Especially when you know you’re right.
The stories our SMI members told us varied in details but had much in common. Here are four recurring themes:
No plan for when to sell.
We heard from people who bought stocks and happily watched them rise. But then they passively stood by and watched them crater to single-digit lows (or even bankruptcy). Some admitted to compounding the problem by optimistically buying more shares as they fell in value, a practice known as “averaging down.”Overly concentrated in a “hot” sector.
When an industry moves into the media spotlight (as tech did in the 1998-2000 mania and again in recent years), investors often respond by investing more and more of their portfolio in that one industry. When the inevitable selloff occurs, their losses are much larger than if they had maintained a prudent level of diversification.Underinvested in stocks.
Out of either fear or ignorance, many investors failed to invest 80%-100% of their portfolios in stocks in their younger days — when time was on their side and they could afford to take the additional risk. This cost them tens of thousands of dollars.Following the wrong advice.
Some people turned their portfolios over to a market professional, trusting that person to get the job done. In some cases, their trust was betrayed due to conflicts of interest — the broker placed a greater value on earning commissions than what was best for the client. In others, the broker was well-intentioned but was inept or using a flawed strategy.
SMI offers an antidote to the major missteps listed above. Our active strategies have built-in “anti-mistakes” safeguards. We offer specifics on what to buy and when to sell. We urge broad diversification and offer age-appropriate stock percentage guidelines. And our recommendations are stewardship-focused and time-tested.
Investing deals with probabilities, not certainties, so no strategy can be perfect. However, we believe the SMI approach will help you steer clear of major mistakes, thus enabling you to grow your money steadily over the long haul.
