No one is perfect when it comes to decision-making.
When investing, it’s common for you to make mistakes as you deal with uncertainty and probabilities.
However, it’s how you react to these mistakes that will make you a better investor over time.
Investment mistakes are common and should be documented to avoid hindsight bias.
By keeping an investment journal, you can also take responsibility for your investment actions and learn how to improve your decision-making process.
Here are three investment mistakes I’ve made early in my investing journey.
I hope you can learn from them and avoid making these mistakes for your portfolio.
1. Buying purely for a large dividend
Picture this: A company had declared a jumbo dividend after selling off some of its assets.
Its shares were quoted cum-dividend (i.e. you can enjoy the dividend if you buy the shares) after this announcement.
Thinking that I would be able to enjoy a nice bonanza, I bought its shares the very next day.
By doing so, I fell into a classic trap – the share price would already have incorporated this large dividend in the next trading day and I was buying it more expensively than the day before the announcement.
This problem showed up clearly when the shares went ex-dividend.
The share price crashed by more than the value of the dividend, leaving me nursing a small loss.
The lesson to learn here is that large dividends stemming from asset sales may imply that the company cannot match prior years’ earnings levels.
Hence, the prospects of the business may be permanently and negatively impacted.
Once the dividend is paid out, the shares will reflect this reality and plunge accordingly.
2. Industry is shrinking or going obsolete
My second mistake was to purchase a company in an industry that was shrinking and growing increasingly irrelevant.
The company, Yellow Pages, was in the business of distributing physical phone books which were akin to encyclopaedias that were stacked with (outdated) information.
The advent of the internet, as well as the use of smartphones, rendered the company’s business model obsolete.
No matter how much capital or effort was invested into growing the business, the management was fighting a losing battle as physical phone books became a sunset industry.
I finally threw in the towel and sold my shares off at a substantial loss to redeploy the money to a better investment idea.
3. Contra trading
Contra trading is a stock market mechanism whereby investors purchase shares in a company without putting money down.
The shares are linked to the Central Depository Pte Ltd (CDP) and take a total of two working days to clear the trade (known as T+2).
If you sell the shares within the these two days at a higher price, you can pocket the difference (after commission and fees) without stumping up any money.
Hoping to make a quick buck, I took a punt by purchasing a chunk of shares of a company called Keppel Telecommunications and Transportation (Keppel T&T), which has since been delisted.
The problem here was two-fold.
I had bought a batch of shares that I could ill-afford (i.e. I bit off more than I could chew) to try to garner a higher contra profit.
I was also brimming with overconfidence that I could time the stock market well enough to sell off the shares for a tidy profit within two days.
However, in the short term, share prices are affected by numerous variables including investor psychology and macroeconomic news, making them highly unpredictable.
Needless to say, the shares had plummeted by the due date and I was forced to sell them at a loss as I could not cough up the cash to buy these shares.
Contra trading is no different from gambling and you’d be better off having fun at the casino’s slot machines.
Look out for the next edition of this series as I detail more silly mistakes that you should avoid.
Disclosure: Royston Yang does not own any of the companies mentioned.
