What are 5 myths about investing that you may have come across? What are the things that people say, think or do that stops them from becoming great investors? These are behaviours that are extremely common among all types of investors.
Digging deeper into them will reveal why you should be a bit sceptical when hearing these myths. I will cover 5 of them in no particular order of importance, so without further ado, let’s get into it.
You need to ‘manage’ your portfolio daily
Staring at your positions and how they are doing on a day-to-day basis does nothing for your overall performance. In fact, it encourages you to make adjustments to them when you really shouldn’t.
If one of your stocks is doing really well, looking at your profit and loss every hour can affect your judgement and could even push you to sell your stock for a profit in the short run but miss out on the real gains longer term.
Sit on your hands and let your winners run. What you should be doing is spending that time being productive, researching potential investments, understanding industry trends and how the wider economy could affect the businesses you are invested in.
That is time spent creating value for your portfolio, as you’ll be armed with more information about the companies and industries you are invested in and will allow you to make better informed decisions in the future.
The market always goes up
Many retail traders that have come to the market in the past few years have only ever experienced a bull market. When you zoom out over a 10-year period, the March 2020 crash looks like a blip in the secular bull run.
Generating returns and beating the index in a bear market however takes a much more active and nuanced approach and can separate the good investors from the great ones. I talk about why active managers underperform the index in the long run here.
Analyst price predictions are accurate
Those 12-month price targets, upgrades, downgrades and analyst recommendations that seem to be given such a high level of significance shouldn’t be solely relied upon if you’re looking to make a decision on a stock.
You can always use them as reinforcement for your investment thesis, and if an analyst recommendation is contrary to what you believe, maybe you should look into it more to see if there is something you may have missed.
No one can repeatedly time the market to pinpoint when a stock is going to go up or down, and if they claim to be able to then they are probably lying to you or trying to sell you something.
We can make a fair assumption that over a long period of time with economic growth that stocks will rise, after all “A rising tide raises all boats”, but we simply do not know what will happen a week, a month or even a year from now.
There are too many variables to consider that are simply out of our control. Not to mention that analyst price targets and recommendations change on a quarterly basis and sometimes even sooner when a compelling event in the business or economy takes place.
You should always be willing to hear someone else’s perspective on a stock but when that comes in the form of a price target prediction or buy, hold, sell recommendation, always remember to think of the motive behind that.
What does that person or business look to gain from influencing investors to make adjustments to their portfolio rather than simply staying long in their current positions?
Retail investors are uninformed
Don’t pay any attention to those who say that because you do not work from an investment bank or a private equity firm that you are at a disadvantage in the market. Yes, they may have extensive research teams and large sums of capital to deploy but they are also hamstrung by mandates and fund investment constraints.
As a large player in the markets, they can also display inability to react to market conditions as quickly as an individual investor. Think of a large truck versus a motorbike, which one has the better turning circle?
As a retail trader, you may have noticed the potential that Tesla had as a leading player in the EV space, arguably the largest growth opportunity of a decade and decided to invest heavily when it was trading at a fraction of its current price.
Since then, you have experienced immense gains in your portfolio. An equity investor in a large institution may have spotted the same opportunity but was limited to only a 5% max allocation in their portfolio due to controls in place in the company they work at. This regulation leads to diluted returns.
If they want to get out of a stock but have such a large holding, it takes time to liquidate that position and can even move the market entirely, whereas you as the individual investor can simply sell your shares in an instant and move on.
Agility and nimbleness are traits that retail investors under appreciate, and that can even give you an advantage over the largest of investors. Instant liquidity is a unique feature of the public equity markets, and as a retail investor, that can be used to your advantage.
You can invest in ‘value’ or ‘growth’ but not both
This idea that growth stocks and value stocks are separate from each other is nonsense and you can find great value when investing in high growth stocks as well. Take Alphabet, Facebook, and Alibaba as prime examples of this. Facebook currently trades at a P/E multiple that is actually lower than the S&P500 while generating $40Bn in free cash flow last year!
Alphabet is slightly more expensive but still manages to display immense growth on both the top and bottom lines. Alibaba is another stock that trades well below its intrinsic value, having fallen over 70% from its all-time-high.
Markets consistently overprice and under-price companies, and this mispricing can happen in sectors that are either deemed more “growth” focused or cyclical, value-oriented industries.
This mispricing does not continue indefinitely. Ultimately, market prices correlate with underlying earnings generation which is much closer to the intrinsic value of the business.
This is where we as investors can find opportunity to invest at discounted levels. Finding a value play in a high growth sector can provide an unprecedented opportunity.
