Investing is easy. Dead easy. But we, investors, sometimes like to make things much harder than they need to be.
Perhaps a little voice inside our head is telling us that it should really be more complicated. The Chinese have a name for that – they call it “drawing legs on a snake”.
Question is: why would anyone ever want to draw legs on a snake?
Exactly – we shouldn’t.
Three legs
Consequently, if we can just keep things nice and simple, then we could stand a better chance of improving our performance over the long term.
So, what are these “legs” that we need to stop “drawing” when we invest?
There are three main shortcomings that we, investors, are often guilty of. I call them the “three overs” – overconfidence, overtrading and overreaching.
Overconfidence
The stock market, we need to remember, is notoriously difficult to predict. There is no way of second-guessing what shares might do from one day to another – let alone from one minute to the next….
…. But that hasn’t stopped many experts from trying to convince us that they can.
So, don’t fall into the trap of thinking that just because one or more of your stock selections have done well that all your picks could do likewise. The stock market can be a very humbling place, even for seasoned experts.
That is precisely why we should have a plan. But more importantly, we should stick with it, though thick and thin.
For instance, I run several different portfolios with very different emphases. They range from a portfolio built around property-focussed shares to a portfolio that homes in on Malaysia’s fast-growing economy. I also have one based around Asian financials.
But they all have one thing in common, namely, a solid base of income shares, a layer of growth stocks and a sprinkling of speculative value counters.
Nothing would ever persuade me to alter the proportions, even if one part of the portfolio is going gangbusters.
Overtrading
If overconfidence isn’t already bad enough, it can, if we are not careful, lead to something far more costly – overtrading.
Picture the scene: you have just bought a share that has gone up 10% within a few minutes. Your brain then goes into overdrive – imagine what could happen if you could repeat the amazing feat every trading day for an entire year….
…. you could be fabulously wealthy in no time at all, swinging from one trade to the next.
Unfortunately, when we trade, we take money out of our bank accounts and hand it over to our brokers. And the more we trade, the more money we hand over to them. Paying unnecessary trading fees can damage the total returns we could earn from investing, needlessly.
Overreaching
If overconfidence is dreadful, and overtrading is damaging, then overreaching could be detrimental to our wealth.
For instance, there might be times when our portfolios might underperform our stated objectives. It can happen. We’ve all been there.
The temptation, then, is to look to riskier investments to boost our returns. After all, it is often said that greater rewards come from taking greater risks, which could mean looking at more speculative shares – penny shares.
But that would be the wrong thing to do.
Investing should always be about working out the yield on an asset over the lifetime of the asset. We should also try to stay within our circle of competence, which is where we are likely to perform best.
Over to you
We should never be afraid to invest provided we follow some simple rules.
Perhaps one of the most sensible pieces of advice comes from Peter Lynch. He said that we need to develop a disciplined approach to investing that enables us to block out our own distress signals.
So, find a discipline that fits in with your personality. Mine is to look for companies that can have the ability to pay rising dividends from now until the cows come home.
What’s yours?
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Disclaimer: David Kuo does not own shares in any of the companies mentioned.
