Rectify Today to Earn Tomorrow: 5 Common Mistakes of Private Investors

Mistake 1. Following the Herd

Many investors, especially those who just started their journey, tend to simply “copy-and-paste” what others are doing. This phenomenon, known as herd mentality, manifests when individuals blindly adhere to the decisions of the crowd. Driven by misplaced trust in reputable analysts and often armed with incomplete information from 24-hour news channels, investors often succumb to the allure of momentum.

Even the intelligent investor is likely to need considerable willpower to keep from following the crowd.
— Benjamin Graham

Illustrative of the success that can come from bucking this trend is the story of Joseph Kennedy Sr., a Wall Street stockbroker, from the late summer of 1929. As lore has it, while having his shoes polished, Kennedy was proffered stock recommendations by a shoeshine attendant.

Kennedy is said to have recognized this as a portent of market excess and knew it was time to get out. He proceeded to exit his current positions and buy short positions that bet on the market going down. Shortly after, his foresight was validated as the stock market cascaded into the abyss, marking the onset of the infamous Black Monday and ushering in The Great Depression.

Escaping the siren call of herd mentality demands a steadfast commitment to introspection. The best way to avoid falling into a herd mentality is to always ask yourself “Why?”

Why is the value of an asset going up or down? Why is that likely or unlikely to continue? By approaching these questions with a clear, rational mind, one can avoid being swept away by the majority. Successful, seasoned investors gather information from several independent sources and conduct their own proprietary research and analysis beforehand.

Mistake 2. Failing to Do Due Diligence

Rushing into investments without conducting thorough due diligence is a recipe for disaster. While a seemingly impeccable opportunity may be alluring, savvy investors will exercise prudence and subject it to rigorous examination.

Indeed, appearances can be deceiving, and the veracity of any prospective venture warrants meticulous scrutiny. Whether gleaned from family, friends, social media, or investment professionals, any information merits thorough evaluation. Remember the principle of always asking “Why?”

In a world with unprecedented access to information and a plethora of investment services, due diligence becomes paramount when appraising potential investments. Don’t accept marketing hype at face value. Instead, find knowledgeable people and sources you can trust and refer to them often. Then, critically analyze the details of every opportunity and separate the wheat from the chaff.

In the end, as Warren Buffett once said, “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

Mistake 3. Attempting to Time the Market

While the adage “buy low, sell high” encapsulates the essence of astute investing, its practical application often veers perilously close to speculation, commonly referred to as market timing. This endeavor, predicated on the elusive quest to pinpoint market inflection points, frequently proves to be a nearly Sisyphean task. Many investors, swayed by intuition or seduced by algorithmic models purporting to forecast market turns, wager significant sums only to be blindsided by losses when their prognostications fail.

The difficulties of trying to time the market
Source: CNBC

A better tried-and-true investment approach is dollar-cost averaging. The strategy involves purchasing assets in fixed franc amounts at regular intervals. With this systematic approach, investors remove much of their ego from the process and safeguard themselves from the hubris of thinking they are able to time the markets.

Mistake 4. Neglecting Diversification

Failing to diversify is comparable to traversing a river on a tightrope when a sturdy bridge is nearby. It's unnecessarily precarious. While haphazardly selecting assets may yield substantial returns, it also amplifies the risk, unlike a well-thought-out portfolio designed with diversification at its core.

Ray Dalio, founder of one of the world's largest hedge funds, Bridgewater Associates, crowned diversification as the “Holy Grail of Investing” in his 2017 book Principles, suggesting that a portfolio should contain about 15 to 20 uncorrelated assets.

While traditional diversification often involves adding a mix of assets at relatively high correlations, the savvier approach incorporates uncorrelated and low-correlated assets. According to Dalio, adding just one uncorrelated asset can mitigate risk by 29%, while the inclusion of 6 uncorrelated assets reduces the risk factor by nearly 60%.

[…] this new approach improved our [Bridgewater’s] returns by a factor of three to five times per unit of risk, and we could calibrate the amount of return we wanted based on the amount of risk we could tolerate.
— Ray Dalio on Holy Grail’s effectiveness

Due to the escalating interconnectedness of markets today, publicly traded assets are becoming more and more correlated, partly fueled by investor herd mentality and emotional decision-making. Consequently, integrating uncorrelated assets is becoming increasingly paramount, and this is where so-called “alternatives” come into play, providing an effective way to diversify a portfolio while lowering total risk exposure across investments.

Mistake 5. Ignoring Inflation

Inflation has been so low for so long, i.e., under the SNB’s target level, that investors have, unsurprisingly, ignored it. In the current environment characterized by still-elevated inflation alongside increased interest rates, astute investment strategies are imperative.

Failure to acknowledge inflationary pressures can erode the purchasing power of investments over time. Imagine inflation like a force pushing the stone to roll downhill. If your returns fail to outpace inflation, your purchasing power gradually erodes. Even though your investments may grow nominally, just as a stone will gather speed as it moves downhill, their real value diminishes over time if they don’t keep up with inflation.

To safeguard portfolios against inflationary impact, investors should therefore seek assets that offer superior returns and intrinsic inflation protection. Real estate stands out as a prime example, particularly in Switzerland, where it’s characterized by robust supply-demand dynamics and sustained influxes of immigration and tourism.

Bonus: The Greatest Mistakes – Never Starting and Giving Up

When it comes to investing, errors often serve as invaluable lessons, guiding us toward wiser choices in the future. Those who evade failure may profit in the short term, but ultimately deprive themselves of crucial learning opportunities. The greatest mistake one could ever make, in the end, is never giving yourself the opportunity to make mistakes to learn from.

Frequently stemming from a lack of foundational knowledge regarding where or how to start, investors need to recognize that the two most important steps they could ever take are first to start and second to not give up even in the face of failure.

The biggest risk is not taking any risk [...] In a world that's changing really quickly, the only strategy that is guaranteed to fail is not taking risks.
— Mark Zuckerberg