Some Common Mistakes by Investors

Over the last one year I attended 3-4 fantastic value investing conferences. Many of the investors had spoken their heart out and many were not comfortable sharing their presentation publicly. Hence I have omitted the company and speaker names. But this compilation of mistakes of these investors could be helpful to both amateur and experienced investors.

Whenever I meet an experienced investor, I am more interested in their mistakes and not their success stories. I believe everyone investment philosophy should be as per their personality, so it’s not possible to follow someone else philosophy. But we can learn a lot from other’s mistakes.  According to Dhirendra Kumar of fund tracker Value Research, Prashant Jain of HDFC mutual fund did not manage funds differently from other fund managers. “He just kept it simple and committed lesser mistakes,”. Read this fantastic article by Shane Parrish on Avoiding Stupidity is Easier than Seeking Brilliance to understand importance of studying mistakes.

Here is the list of mistakes shared by investors:

Management

  • Overlooking obvious good companies because of some small wrong acts of management eg. High remuneration, preferential issues at lower price etc. Refusing to invest in micro and small cap with fantastic business model and growth because of some IGNORABLE wrong acts of management is one of the most common mistake.
  • Investing with fraudulent management
  • Don’t be too close to management

Buying

  • Despite sitting on 65% cash during 2007-08 crisis I did not have buy list. Important to have your buy list which you want to buy during correction.
  • Chasing mediocre opportunities.
  • Buying low quality cheap companies.
  • Value traps
  • Fraudulent companies.
  • Buying statistically cheap companies.
  • Buying not enough due to price anchoring bias.
  • Historically making money from leveraged company insignificant.
  • Take valuation risk and not insolvency risk.
  • Have a clear idea about where you will and will not invest. Exclusion is a more powerful idea than inclusion. Not possible to do research on all the listed companies.

Selling

  • Selling very early [This is the top mistakes of all investors]
  • Difficult to time market: Successfully exited during 2007 euphoria but entered quite early.
  • Buying and selling in one shot instead of in a staggered way.
  • Falling in love with stock and failed to notice fundamental deterioration.

Special situation

  • Despite all catalyst, in-depth research process, special situation did not play out.
  • Black Swan in special situations more common
  • Allocation most important in special situations, max 4-5%

Others

  • Endowment bias – not listening to contrary opinion on stocks which I own.
  • Commitment bias – publicly spoken about stock – made it an ego issue – could not exit the stock before crash.
  • Maintain investment diary clearly writing reasons to buy/sell. WRITE REASONS for rejecting stocks too. When we write we think deeply and clearly. Use checklist to overcome various biases.
  • 30% of results are not correct even if audited by big 4. That’s why it’s very important to link P&L & Balance sheet to company’s business model, terms of trade and competition. One should read notes to account carefully.
  • Focus on action not on words.
  • Success breeds ARROGANCE.
  • Beware of quality traps – High valuation but low growth.
  • Ignored valuation during tech bubble and invested in stocks quoting at PE multiple of > 100x.
  • Scuttlebutt suffers from huge sampling bias. Be careful while drawing conclusion based on your interactions with ex-employees, customers, suppliers etc.

My top mistakes

  • Authority Bias: Failing to do full due diligence because stock is bought by some famous investors [Which Mohnish Pabrai calls it as cloning]. Though I have never practiced blind cloning, I have realized that when you pick up stock because some famous investors have invested in it, we tend to suffer from some authority bias. But this do not undermine the advantage of cloning. One should just be aware of its side effects. I have found some investors who refuse to invest in ideas which come through other investors and some who blindly invest in successful investor ideas. Both are bad. One needs to remember that investors are like parasites who just need to hitch on to good things. Whether you discover this good thing or it comes through someone else, really does not matter. Just be sure that its a good thing based on your due diligence and conviction. There is no place for ego in investment success.
  • Investing against my own personality -I cannot invest without indepth research but followed a widely diversified portfolio. I eloborated more on this here [Return per unit of time invested]
  • Changing investment thesis just because of increase in price – Eg. Halonix – I invested in a classic deep value out of favor stock and when price increase by 4x and it was trading at fair value, decided to “Let the winners run”. I failed to appreciate that “Let the winners run” is appropriate only for growth stocks which enjoy strong moats for next 5-7 years and not very stock. Exiting at fair value is very important in case of Graham stocks.
  • Focus on deep value rather than growth: Despite repeated reminders by many of my value investor friends I failed to appreciate the importance of growth. India is a growth market and growth stories will get re-rated faster compared to deep value. Whether one looks for growth over 2 years, 5 years or 10 years is upto each investor. But growth is a very important consideration. Now I look for minimum 20-25% profit growth over next 5 -7 years.

I would like to end this post with a contradictory thought that trying to avoid every mistake may lead to increase in errors of omission. Below is an extract from superb presentation “Moats versus Boats” by Chetan Parikh.

Errors

Request: I request all investors to share their top three past mistakes. It will benefit everyone. If you are not comfortable sharing on public platform, feel free to e-mail me at anilt@contrarianvalueedge.co.in or anil1820@gmail.com

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14 Responses to Some Common Mistakes by Investors

  1. Beautiully written , Anil… Thanks for sharing your learning. My top 3 mistakes are :

    1) Investing blindly in companies without doing a iota of basic research – 3i Infotech , SREI Finance , Lakshmi Energy and Foods

    2)Believing blindly in buy and hold – Buy and hold is applicable only for companies with strong fundamentals and good growth prospects, which by definition is a minority

    3)Investing too little – Even when I got my business and valuation calls right , invested too little an amount for it to change my portfolio or life very much

    These are the top 3 from a huge portfolio of mistakes to pick from 🙂

    Like

  2. Jana Vembunarayanan says:

    Anil,

    Thanks for putting this well thought out post. Here are few things that I am in the process of correcting.

    (1) I build up position over time. This has resulted in not investing enough during my initial purchase even though the price-value gap is huge. The lesson is not do an SIP kind of a build up for everything and instead buy 50% plus during the initial purchase, if I am convinced on price-value gap.

    (2) I study business that are bought by authority figures. And after through research if I am convinced I buy. This is not a bad strategy. But the only problem is that I don’t have enough business models in my head. Recently I have started to study business that I would be proud to own one day irrespective of some authority figure bought it.

    As you pointed out cloning is not a bad strategy. But after my recent India trip I seriously doubt if majority of retail investors do due diligence in their research work while cloning. And to me most of them copy and think that they’re cloning. The difference between the two is night and day.

    Regards,
    Jana

    Liked by 1 person

  3. Excellent Article Anil – You have almost handed over a negative checklist to us 🙂
    Also your question has left me in quandary, picking top 3 from tens is very difficult but I will still give it a shot

    First one is investing my time unproductively in trading and F&O without knowing the rules of the game. I am not in camp which is against trading or derivatives but too many small guys get in and then are sucked out as margin of error is thin and losses are magnified due to leverage. I tried capturing my thoughts in one of my old post as well – http://www.tankrich.com/2013-3-learn-from-thy/

    Second one – our personal experience (bad) has limited value when evaluating invest in a large company with thousands of customers, I have learned it hard way by missing some top names like HDFC bank (wrote about it – http://www.tankrich.com/2015-15-how-not-to-apply-scuttlebutt/) Dabur, Emami and Bajaj Auto

    Final one was inability to allocate even though I am convinced about story and have done all the hard work, By nature I am conservative and that drives my investment philosophy as well, I have made this mistake in past (Page) and even today I would like keep my positions balanced even though I know through work that some of them have better odds

    Cheers

    Like

  4. Pingback: Read, Learn, Improve – 24-Oct-15 | Random Thoughts of Analyst

  5. Hi Anil,

    Excellent post. I really loved the “Changing investment thesis just because of increase in price” concept. I have had issues with this in the past myself, so completely agree with you. I have made the same mistake you did with Halonix. Changing the story in my head when the price ran up, and realizing much later that this was a value play I had got into and not a long term growth one. So, now when I buy something purely on valuations, I make a note of it (an entry into OneNote) and state clearly that the main consideration is to get to fair value. Clearly putting a distinction between a value “trade” versus a value “investment” has worked well for me.

    Regards
    Abhishek
    http://valueinvstr.blogspot.com

    Liked by 1 person

  6. Hi Anil, Very well written. You, however, left a very difficult task for your readers. To come up with top 3 mistakes out of the uncomfortably long list 🙂
    Well here are few from my end and hopefully this will help someone to correct theirs.

    Since Value is of paramount importance in the buying decision, I have had a very difficult time adjusting to the idea of paying premium for quality business. Since there is a long term visibility of consistent profit and a reasonably visible growth, the chances of getting such businesses at an extreme undervaluation (after considering the margin of safety) is very rare and that should not deter one from building positions in such businesses. That’s a lesson learned a very hard way and its in my mental and written checklist. But I have to admit, it is very difficult even now to build large positions in such names.

    Another major mistake that I have committed number of times and which doesn’t leave me so easily is the difficulty of replacing an existing portfolio stock with a new idea. Now the difficulty has some valid reasons but its more to with the irrational reasons than the rational ones. It has been very difficult to replace and Old winner with a new potential winner. Reasons: Inability to think in terms of opportunity cost, familiarity is higher with the existing portfolio stock than a new one. This mistake is the worst of its kind as one doesn’t see these mistake visible at the end of the year assessment as one doesn’t see these missed opportunities

    A very important development for me is that of concept stocks/high possible upside category. Even though to categorize it as a mistake might not be right but over many years, I have learned the significant of having some stocks which are not the part of my investment philosophy (either due to nature of the business or due to the lack of history of the business model) but possess characteristics which can lead to significant out-performance when they work out. I call them ‘Bugsy’ stocks and have dedicated a part of my portfolio to such stocks.

    Cloning is an art which took a lot of time to improve and even now some errors do occur but mostly the errors occur in the process of cloning. In the initial years of my career, these mistakes were really painful and costly and looking back at them have really helped me streamline the process.

    Infact, sometime back ,I gave a talk about my learning and checklists developed to incorporate 2 of the above discussed things: ‘Bugsy’ Stocks and Cloning.
    Would love to hear your thoughts on it too and your readers also if possible. 🙂

    This is the link to that : https://goo.gl/SdNqq9

    Liked by 1 person

  7. Thanks for sharing in detail your thoughts Puneet…In general I have all the problems you listed above.. so we are in the same boat….

    Regarding Bugsy stocks, for some time I tried to follow something very similar which I was calling venture capital investing.. But the problem which I faced was i was allocating hardly 1% and I realized I was allocating to all stocks which can also be classified as concept stocks/ fad stocks…So decided to stick to only two categories emerging moats [ROCE > 10% but less than 20%] and established moats…..

    Regarding cloning I realized that even with detailed research there will always remain some elements of influence of authority and I did make some mistake in buying some stocks [subsequently sold]…I still actively track the stocks bought by good investors but try to be aware of authority bias…

    Like

  8. Maulik Rachh says:

    Hi,

    My first investments were in BHEL & ROLTA in which i have lost good amount – reason was poor corporate governance companies – after that i have never picked such companies – happy to learn in first investment itself 🙂

    Like

  9. Pingback: What causes Wealth Destruction over Long term? Lack of Growth and ROE below 15% | ContrarianValue Edge

  10. Thanks Anil for the post – we are using the blog post as presentation to learn within our group of Global Value investors including the comments. To make sure we learn from the mistakes.

    Thanks
    Hari

    Like

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