Steer clear of these five investment mistakes

James O'Shaughnessy is the founder of O'Shaughnessy Asset Management (OSAM), a leading quantitative asset management firm and a wholly-owned subsidiary of Franklin Templeton. He is also the author of 'What Works On Wall Street'.

In an insightful interview, O'Shaughnessy talks about the common mistakes investors make in the ups and downs of the market. Further, he offers key advice to be successful in investing. Here, we list the mistakes and essential takeaways.

The fear-driven sell-off

O'Shaughnessy points out a crucial mistake among passive investors: the tendency to panic and sell their index funds at market lows.

"The only point of failure that a passive investor faces is panicking near market bottom and selling out of all of his or her index funds. That's really the only thing they have to worry about...and sadly, I have seen many, many people who swore that they would never ever do such a thing, do exactly that."

However, he also mentions that this issue isn't confined to passive investors; it's also prevalent among active investors.

The risk of short-term focus

He emphasises the dangers of basing investment strategies on short-term data. This approach, he argues, is bound to fail as it's more noise than signal.

"So the majority of people who are actually making decisions on whether they're going to stick to an active strategy are using possibly the worst time frame to look at, and that is three years... a lot of people that I know who do it on a quarterly basis, but what I can tell you is if you do this on a quarterly basis, I will guarantee that you will fail because... it's all noise."

Succumbing to biases

O'Shaughnessy delves into the psychological aspect, discussing the 'recency bias' in behavioural finance. This bias leads people to overemphasise recent events and mistakenly project them into the future.

"...there is a bias in behavioural finance called the recency bias, and we all are subject to it... Recency bias simply says we pay the greatest attention to what has happened recently, and then, to compound our error, we forecast whatever has been happening recently into the future, a very, very bad mistake to make."

Successful investors, he notes, ignore such biases and avoid relying on forecasts.

Focusing solely on outcomes

For O'Shaughnessy, a good investor prioritises process over outcomes.

"When you value process over outcome, what becomes more important to you is to study as much data as you have available to you to see how things in general turn out. You're not always going to be right."

"...good investors value process over outcome... The point is a pretty simple one. If you have access to long-term data, you're going to get much better information about whether the process that you're looking at actually makes sense."

Lacking discipline

O'Shaughnessy stresses that active investing demands patience, persistence, and discipline - traits not innately present in most people.

"To be a good active investor requires patience and persistence, and most of us are not genetically designed to do this. We want results now..."

He describes the active investor's journey as a cycle of highs and lows ('hero-goat' cycles) and underscores the importance of a high 'active share,' concentration, and strong convictions in one's investment choices.

"If you're an active manager, if you want to do it on your own, you have got to get ready for the idea that there is going to come a point in time where you look really stupid... you are going to underperform. Sometimes by a lot. That's when you have to have discipline... And let me tell you, it's really, really easy to say you're disciplined, and doing it is virtually impossible."

While this summary encapsulates O'Shaughnessy's key points, the full interview offers more comprehensive insights.

Also read: Seven investing mistakes to avoid