Seven investing mistakes to avoid

Your returns run in harmony with the frequency of your mistakes. The fewer mistakes you make, the greener your portfolio gets. But how does one know if they are about to make a wrong investment call?

You can always seek the guidance of investing greats like Pat Dorsey. He founded Dorsey Asset Management and is renowned for developing economic moat ratings.

We recently came across his book, The Five Rules For Successful Stock Investing. In the book, Dorsey spoke of how investors often make these seven investing mistakes.

• Taking on unnecessary risks: Many misinterpret the high-risk, high-reward analogy and take on unnecessary risks. In the long run, such risky bets end up slashing the returns your winners get. Dorsey writes in his book, "Loading up your portfolio with risky, all-or-nothing stocks—in other words, swinging for the fences on every pitch—is a sure route to investment disaster".
  
• Believing that it's different this time: Not learning from the past is a grave error, be it in life or in investing. Repeating the same mistakes in hopes of different results is a sure-shot way to lose money. Dorsey says, "The four most expensive words on Wall Street are "It's different this time." History does repeat itself, bubbles do burst, and not knowing market history is a major handicap... You have to be a student of the market's history to understand its future. Any time you hear someone say, "It really is different this time," turn off the TV and go for a walk".
  
• Falling in love with products: As a consumer, you may like your local fast-food outlet to double the fries at the same price. But as an investor, would you want your companies to run at a loss? So when you invest in a company, your focus should be on how the business will perform in the long run. Dorsey summarises this in his book and says,"When you look at a stock, ask yourself, "Is this an attractive business? Would I buy the whole company if I could?" If the answer is no, give the stock a pass—no matter how much you might like the firm's products".
  
• Panicking when the market is down: The secret to equity investing is buying low and selling high. A market downturn is the perfect opportunity to buy undervalued stocks. However, the doomsday mongering that is present during every market downturn leads to investors panicking and missing out on attractive buying opportunities. Dorsey says, "Stocks are generally more attractive when no one else wants to buy them, not when barbers are giving stock tips... You'll do better as an investor if you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavor of the month in the financial press".
  
• Trying to time the market: This one needs no introduction. We have all heard of the fallacy of timing the market. Dorsey quips, "Market timing is one of the all-time great myths of investing. There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you".
  
• Ignoring valuation: A good company bought at unsustainable valuations is a recipe for disappointment. Dorsey writes, "The only reason you should ever buy a stock is that you think the business is worth more than it's selling for—not because you think a greater fool will pay more for the shares a few months down the road".
  
• Relying on earnings for the whole story:Not all that glitters is gold, and not all earnings get converted to cash flows. Investors often focus too much on earnings growth and completely disregard cash flows. Dorsey writes in his book, "At the end of the day, cash flow is what matters, not earnings. For a host of reasons, accounting-based earnings per share can be made to say just about whatever a company's management wants them to, but cash flow is much harder to fiddle with".

Knowing the mistakes is only part of the puzzle. Honing your temperament so that you can avoid these mistakes is the rest of the test.