Nov 5, 2024
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Legendary investors Warren Buffett and Charlie Munger turned Berkshire Hathaway into a multi-billion-dollar juggernaut through savvy investments.
Munger, who passed away late last year, often alluded to the fact that their investment success was based on exploiting market inefficiencies and being contrarian.
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“Warren, if people weren't so often wrong, we wouldn’t be so rich,” he told Buffett during the annual shareholder meeting in 2015.
Investors repeating common mistakes is a major reason we have so many of these market inefficiencies in the first place. To succeed as an investor, you need to be aware of these mistakes, avoid them, and exploit them when you have the opportunity.
Here are the top 3 investing mistakes that should be on your radar.
3. Succumbing to emotions
Emotional decision-making is a common mistake investors make. According to research, cognitive biases such as herd mentality, loss aversion, anchoring bias and hindsight bias can diminish your ability to make good investment decisions.
Experienced professionals aren’t immune either.
We can’t know the exact reasons behind it, but in early 2023, investor Michael "Big Short" Burry, activist shareholder Bill Ackman, and hedge fund manager Ray Dalio all made several pessimistic statements about the market and placed bets against stocks and bonds. These bets failed, as the S&P 500 stock exchange surged 24% in 2023.
To avoid these pitfalls, Buffett recommends being a “no-emotion person” in matters of business and investing.
“My partner Charlie says there are only three ways a smart person can go broke: liquor, ladies, and leverage,” Buffett once said.
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2. Under- or over-diversifying
Diversification is an important, but often misunderstood, tool. Passive investors in index funds may fail to recognize the level of concentration within their portfolio. They may own multiple funds with similar holdings, not realizing there’s overlap. Experts recommend investing in a reasonable mix of bonds, stocks, cash and other assets.
Investors also overlook their home bias, according to global asset management firm AllianceBernstein. American investors stick to U.S. stocks and overlook the benefits of diversifying with foreign equities.
Meanwhile, some investors may be too diversified.
“Owning significantly fewer is considered speculation and any more is over-diversification. At some point after continuing to add individual stocks to your portfolio, you may ‘own the market’ and be better served in purchasing an index fund that’s able to trim positions and rebalance in a tax-efficient manner,” Jonathan Thomas, private wealth advisor at LVW Advisors, told Time Magazine.
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Other successful entrepreneurs, such as Mark Cuban, have said similar things. Cuban’s business philosophy was also to “look for inefficient markets." and has warned against too much diversification.
If you’re worried about whether your portfolio is optimally balanced, remember that you can also look outside the stock market to diversify your investments.
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Many investors also overlook the power of their daily spending to fuel their portfolio.
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1. Trying to time the market
Countless studies, including one by Morningstar, have shown that uninterrupted time in the market is better than trying to time the market. A buy-and-hold investment strategy outperformed a strategy where investors tried to time the market based on fair-value estimates over a three-year period ending in 2023, according to this study.
By dipping in and out of the market, you risk missing some of the strongest days of gains. Analysis by Capital Group found that the chances of a positive return from the S&P 500 was 94% if the index was held for a period of 10 years.
So, avoid the temptation to go with your gut, and stay invested for the long term.
I you've got a stock that you've had your eye on for a while, you should consider investing with Public, where you can easily buy and trade stocks, options and exchange-traded funds (ETFs).
Public not only offers commission-free trading but also provides a high-yield account where you can park your cash between investments. Public also has social features, enabling users to follow and learn from other investors, share ideas, and stay updated on market trends with real-time insights — kind of like its own internal Reddit community.
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