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Home Smart Investing 2 Investing Pitfalls

2 Investing Pitfalls

Investors are prone to behavioural biases. I am guilty of some, which have caused me to commit investing mistakes and miss out on some of the best deals in the market. Here are two biases that have cost me dearly.

Avoiding mega-cap companies

One investing fallacy is that mega-cap companies can’t grow much.

Today, Apple, Amazon and Microsoft are each worth more than US$1.5 trillion. For those counting, as of 17 July, each of the trio was worth more than the entire South Korean stock market, which had a market capitalisation of US$1.4 trillion.

Can companies of that size realistically grow much more?

I used to shy away from mega-cap companies simply because I believed in the law of big numbers. It is much harder to grow meaningfully when a company reaches a certain size.

However, when I looked back at records, I realised that the biggest company 25 years ago is not considered big today.

Back in 1994, the largest US company by market cap was General Electric. At that time, it had a market cap of US$84.3 billion.

Back then, you would have thought that a company of that size could not grow much more. Today, Apple is worth more than 20 times as much as General Electric was at that time. This illustrates that there is no limit to how big a company can get.

25 years from now, a trillion-dollars might look like what a billion dollars is today.

Instead of focusing on the size of the company, we should look into the company’s fundamentals.

Can the company grow its revenue, profits and free cash flow meaningfully over time from today? Does it have the right management team in place to take it to new heights? Is the company reasonably valued? These are more important than the size of the company. Sometimes, the biggest companies may still turn out to be the best investments.

What goes up must come down

I prefer buying stocks that are below their all-time highs. Who doesn’t?

However, sitting on the sidelines can sometimes do more harm than good, especially if you have identified a quality company to own at a reasonable price.

For example, Amazon is one of the best-performing stocks of the past two decades. Although there have been steep drawdowns along the way, its stock price also often reached new all-time highs, as top-performing companies naturally do.

It is very likely that most investors who managed to buy Amazon’s shares in the past, had to do so at (or close to) an all-time-high-price at the time.

Because of my aversion to buying in at a new high, I never got the chance to buy Amazon shares for my personal portfolio. I first wanted to invest in 2017 when its shares were trading around US$720. However, as it was near a peak then, I decided to hold out to try to get a bargain. As luck would have it, and because Amazon’s stock was likely worth much more, the stock price rose instead of falling.

Not wanting to buy at US$720 meant I couldn’t pull the trigger when it reached US$900 either. Nor could I do it when it reached US$1200. By then, even though the stock experienced drawdowns, it never reached the price I initially wanted to buy it at. Consequently, I never bought Amazon for my personal portfolio and I missed out on market-beating returns. Today, Amazon trades upwards of US$3100 per share.

Lessons learnt

Behavioural biases affect our decision-making and often cause losses or result in us missing out on big returns.

I’ve learnt from these mistakes the hard way. My takeaway is that it’s more important to focus on company fundamentals and buy a company at a good price, regardless of the size of the company or recent share price movements.

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Note: An earlier version of this article was published at The Good Investorsa personal blog run by our friends.

Disclosure: Jeremy Chia does not own shares in any of the companies mentioned.

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