Posted on Friday, March 29th, 2013 | In Contrarian Perspectives
Watch an amateur golfer miss a putt and you will see two frequent errors.
The first is that the putt will finish on the low side of the hole. (That’s golf slang for saying the ball broke more than the putter was anticipating.) Statisticians say it’s the reason for nearly two-thirds of amateur golfers’ missed putts.
However, the second error is the really dumb one. That’s when the putter turns away in agony as the putt runs by the hole and in doing so doesn’t see the exact break the ball will make on the way back. It’s why you see so many amateur three putts. Or, worse, four putts. (Asked once how he managed to four-putt a green, Spaniard Seve Ballesteros replied, “I mees. I mees. I mees again. I make.”)
Investors often make the same kind of mental errors. It’s called not learning from your mistakes.
Just as an experienced golfer learns to play a bit more break and watch intently when the ball misses, a good investor has to learn why certain trades don’t work and why – and then adjust accordingly.
For example, back when I was a money manager, I met a man who complained that he couldn’t understand why he lost money on so many stocks. But when I took a look at his portfolio, the reason was obvious. He liked to buy very low-priced shares.
“It’s easier for a one-dollar stock to go to two dollars,” he said, “than for a fifty-dollar stock to go to a hundred.”
That might sound reasonable to some folks but the fact is it simply isn’t true. Mountains of research have shown that the best-performing stocks over the past 100 years have sold for more than $15 a share. This gentleman was unaware of this – and kept making the same mistake, buying essentially penny shares of young, unprofitable companies and then taking a bath over and over again.
Once he quit doing this, he had no trouble making money in the stock market.
Other investors make different habitual errors. They are too eager to take profits or too reluctant to cut losses. They tend to invest when they feel optimistic and sell when they feel pessimistic. (A great way to buy high and sell low.)
They concentrate their investments in only one sector, like energy, gold or technology. Or they put too much money in individual positions. Many investors, for instance, will divide their portfolio among five stocks, putting 20% in each. That’s not enough diversification and a single loser can punch a big hole in your portfolio.
Most investors think the only good thing about a losing trade is they can use it to offset a winner for tax purposes. But, in truth, the real value is in learning what not to do and why.
So review all your past trades for commonalities. See what you did right. But make sure too that you understand what you did wrong. It may feel like a painful process but it helps you avoid future pain.
It’s how smart investors get richer.
Editor’s Note: As you can probably tell by today’s essay, Alex is an avid golfer. And a few months ago, our publisher met Alex for a round at Doral’s Great White Course. It was here that Alex revealed one of his most golden investment secrets – one he’s used to earn gains of 290%, 335.71%, and 488.89%. And our publishers decided to find a way to bring this strategy to a select group of our daily readers.
I’ll warn you though, this isn’t for everyone. To learn more, click here.
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