Avoid Potholes in Investing

A pothole is anything that can ruin your trip and may often cost you money to fix the damage it creates. Just as your investment portfolio requires a good balance between safety and strategy, a powerful engine can be dangerous without adequate brakes. 

While driving home the other night, I got into a terrible pothole that wrecked my car. All the lights stopped working. I am usually a careful driver but because I was trying to maneuver around a bend to reach my destination quicker, I changed my lane and got into the rot. It was truly an unpleasant experience and it reminded me of the attitude of many investors.

With many people, investing is approached in the same way as the frequent lane changers who only seem to focus only on the traffic around them and don’t look or plan ahead. They focus on short term performance and will move their investments from manager to manager, shuffle from stock to stock in the hope that past performance will guarantee future stock progress. This is usually a bad idea just as it is sometimes a bad idea to change lanes.

Extrapolation is a very dangerous investing technique and is usually seen when there is a tendency to estimate the future based on the assumption that current trends will continue or even accelerate. Peter L. Bernstein, the late financial historian when asked what the mistakes of investors are, said ‘’extrapolation’’. Instead of constantly changing lanes, it is wise to stick to the one you are in, instead of jumping around on investment ideas and experimenting with different lanes and different stocks.

Some drivers don’t care much and speed uncontrollably in any given circumstance. Have you seen some cars race through the third mainland bridge when that bridge is somewhat free? I sometimes wonder why they do that. Whatever the reason may be, they are taking a big risk and bad things can happen to them. This is similar to investors who rush into purchasing stocks and ignoring them expecting their broker to monitor them. This can be deadly when you just rush into purchasing stocks without doing the necessary checks and knowing the appropriate time to buy, hold or sell.

There are other drivers who are preoccupied with distractive activities whilst n the wheels. For example, they are always on the phone talking away, or responding to a chat while driving. They usually drive slower than others and because they are busy multitasking, they end up in a bad ditch. Sometimes investors do not devote time and effort into managing their money and stocks the way they should. They are too busy letting the noise from other stocks that have suddenly done well get them into a constant state of "I wish i bought this or that last week"! The noise from rumours can also be a constant distraction from following through and executing their chosen strategy.

A pothole is anything that can ruin your trip and may often cost you money to fix the damage it creates. Just as your investment portfolio requires a good balance between safety and strategy, a powerful engine can be dangerous without adequate brakes. Stay safe, trade in the right lane.