When it comes to building wealth, what you don't do can be as important as what you do. Growth investors can save a lot of money by avoiding these five common blunders.
Fixating on price.
We all have a tendency to anchor ourselves to past reference points. People will often look at stocks that have reached new 52-week highs and conclude the shares must be too expensive simply because they're no longer as cheap as they once were.
The reality is that the best-performing stocks have a tendency to constantly hit new highs over a number of years – that's why they are the best-performing stocks. So if you dismiss all stocks that are at new highs you're closing your mind to the biggest winners.
Selling too early.
Let your winners run. People will often sell a stock simply because they have made a quick gain on it. They want to lock in their profits.
My advice? Don't sell a stock until the reason you bought it is no longer true.
I learned this lesson first hand. Around 2003, early in my career as a Bay Street analyst, I bought Apple Inc. for the first time. The company was well into its iPod boom but had yet to unveil the iPhone and iPad. I sold the stock after a quick 50-per-cent gain, simply because I had made a great profit.
I eventually bought the stock again when the iPhone was announced in 2007. This time I had a long-term perspective in mind. Despite Apple's big drop recently, I'm up 160 per cent on my stock, which is 17 per cent annualized. Not bad.
But it could have been a lot better. If I had just stuck with my initial investment from 2003 I'd be up about 23 times more than I am now. My initial $10,000 investment in Apple would be worth about $600,000.
Becoming emotionally attached to a stock.
Investments don't always work out. We all make mistakes. The real problem is that it's easy to become emotionally attached to a stock.
When this happens, we develop tunnel vision; we focus on a small area of the business that supports our view rather than zooming out and seeing the big picture.
Professionals are even more prone than do-it-yourselfers to fall into this trap. In his wonderful book, Influence: The Psychology of Persuasion, Dr. Robert Cialdini says people who make public statements about a belief will develop a stronger conviction that the belief must be true.
So an analyst or portfolio manager who argues his point publicly will tend to have an especially tough time backing down from that view. It's about human behaviour, not intelligence.
Thinking your opinion is the one that matters.
People have a tendency to spend too much time considering only their own perspective.
When you do this as an investor you can easily form conclusions based solely on how you see a product or service fitting into your own life. If you're addicted to all of the latest television series, Netflix may not be appealing to you and you could easily find yourself arguing how useless the service is.
The evidence, though, says something completely different. Netflix's subscriber base keeps growing.
Is everyone else just plain stupid? Probably not. Always follow the evidence rather than get stuck looking only at your personal use for a product or service.
Investing in what you don't understand.
I'm a technology geek. I love this stuff. I understand the trends. Consequently, I'm comfortable investing my money based upon those trends.
But you won't catch me investing in the latest biotech company. I don't know much about the sector, and I couldn't tell you anything about how to analyze the next potential blockbuster drug.
Stick to what you enjoy. Chances are you'll understand the stocks in those industries better than others. You'll be more likely to listen to conference calls and read company press releases. It won't feel like work to you because it's actually fun. And best of all, your chances of making a big mistake will go down.