43. 8 Great Behavioral Investing Mistakes

Show Notes

    • Overdiversification

        ○ Buying a bit of whatever performed best last year, repeat

        ○ Eventually, they own the worlds most expensive and least efficient index fund

    • Under diversification

        ○ Narrowing of a portfolio down to one idea

        ○ 1999, Dot.com IPO's, ecommerce stocks, and telecommunications stocks

        ○ In the bear market that followed, the broad US market down 50%, Nasdaq down 80%

        ○ Single stock portfolios - tons of one-time "one-decision stocks" now either totally gone or worth a fraction of what they once were

        ○ Examples today - owning company stock, owning only bank stocks, owning only high-tech stocks

    • Euphoria

        ○ A complete loss of an adult sense of danger

        ○ Your only concern is that somebody, somewhere, owns investments that are going up more than yours are

    • Panic

        ○ Spring of 2020, US market down 34% in about 20 trading sessions

        ○ Panic is a loss of faith in the future, and a belief that somehow this time is different

        ○ S&P 500, 74% up from bottom on March 23, 2020

        ○ S&P TSX, 66% up from bottom on March 23, 2020

    • Leverage

        ○ Borrowing at 2-3% to invest in stocks that long-term return 10% 

        ○ Very rational for some, rarely practiced this way

        ○ Too often done at the wrong time to buy the wrong things

        ○ Often done after the markets has been going straight up to buy very speculative investments

    • Speculating when you think you're investing

        ○ Ie. The investor who owned 5 tech IPO's in 1999 who said they were investing in "e-commerce"

        ○ Today - art, cryptocurrencies, etc.

        ○ Why do you own this?  If the honest answer is "because it's been going straight up for the past 6 months", you are absolutely speculating - goes for individual companies or funds

    • Investing for yield instead of total return

        ○ Ie. Buying puerto rican government bonds at 8% or 10% yield, or a Mortgage Investment Corporation with a "guaranteed return" of 8%

        ○ Investor will fixate on the guaranteed income, ignoring the fact that they are taking on risk

    • Letting cost basis dictate investment decisions

        ○ Ie. Don't want to sell a loser after it's lost a bunch of money

        ○ Ie. Don't want to rebalance out of a very concentrated position, wanting to avoid taxes

They won't get a big chunk out of harms way, to avoid having to pay tax on a small portion of it.

LINKS:

https://www.nickmurraynewsletters.com/products/item78.cfm

Inversion: The Power of Avoiding Stupidity (fs.blog)

SKI Videos:

Thanks for listening/watching!

Mark