Four common investing mistakes

Investing is a loser's game.

No, recent losses haven't turned us bitter towards the investing game. We are simply stating what Sanjay Bakshi, renowned Indian investor and Managing Partner at ValueQuest Capital, said in his 1996 article 'Why Most Investors are Mostly Wrong Most of The Time'.

In this article, Bakshi states that winning in investing is more about making as few mistakes as possible rather than making brilliant decisions, which is the definition of a loser's game.

So the next question that pops up is, what are these mistakes, and how does one avoid them?

While Bakshi doesn't disclose his trade secret of how to minimise investing mistakes, he goes over the common mistakes investors are privy to.

Investing in the wrong asset
Bakshi says that 'most investors make the fatal mistake of buying stocks when bonds are more appropriate and vice versa'.

The truth is there is no one-size-fits-all when it comes to asset allocation. How much you invest across different asset classes (equity, debt, etc) should depend on your risk appetite, investing goals and relative attractiveness of each asset class. Following the herd for your asset allocation is an invitation to disaster.

Timing the market
Not just Bakshi but nearly every market veteran has spoken about this. Many investors believe that the only way to make money in the market is to predict when it will go up and down.

And we have an entire industry of stockbrokers and punters profiting off the claim that they know what is about to happen. But the truth, as eloquently put down by Bakshi, is 'if anyone possessed the ability to accurately predict stock market movements consistently, he would become a very, very rich man so quickly that he would not find it necessary to sell his forecasts to the general public'. Yet many continue to ignore this fact and base their buys and sells on tips from brokers, friends and, at times, even strangers.

Also, timing the market means frequent transactions and more investment decisions, which means more chances of making mistakes. And that's what you want to avoid.

Falling for the hype
In the article, Bakshi writes that "a great deal of investors focus on factors that are completely irrelevant in evaluating the worth of a stock."

And in the era of unicorns and new-age companies where focusing on fundamentals has fallen out of fashion, many investors frequently make this mistake.

Always remember fads and hype might work for the short term. But the markets always discard the duds and reward the performers in the long run.

Temper tantrums
Instead of research, investors often let their emotions decide the buys and sells. Many are often reluctant to admit they have made a mistake and hold duds hoping to avoid a loss. On the flip side, many often exit too early in the eagerness to book profit.

Bakshi points out this fatal flaw of letting emotions drive investing decisions in the article and says, 'many investors get irrationally euphoric when stock prices rise and depressed when they fall'.

Your takeaway
While Bakshi's take on common investing mistakes is indeed a rewarding read, it highlights a far more important aspect of investing. Everyone makes mistakes, and it's part and parcel of the game. Even the legendary Warren Buffett got burned over his investments in stocks like US Air. However, what makes him the greatest investor of our time is he never repeats those mistakes.