Along the 7 years of my investment journey, I noticed certain similarities in the investors who often fail in their investment operations (negligible returns / net losses)

It is as if these people have figured out a formula to create the opposite of “Midas touch” and unfortunately the traits that they exhibit are more common than we like it to be.

Let us explore the 3 types of traits or reasons as to why people fail in their investment operations and how you can avoid falling into such behaviors.

1. Insufficient understanding and improper research

Doing your due diligence is something that is often very commonly preached but rarely practiced.

Most people believe that by reading a few articles and analyst report online, they have done their due diligence – not even close.

It amazes me how people can easily pour years of their salary into the idea of “investing” but spend only minutes studying up on what they should invest in.

By engulfing in such false belief, I realize that this group of people are most likely to become the sheep of the market.

They will buy and sell based on what they hear from others without confirming, in greater detail, the actual fundamentals of their investments.

Unfortunately, this group of people are usually the retail investors who become the much-needed liquidity by other investors who bothered to do their homework.

I’ve seen and profited from these developments repeatedly in stocks such as Riverstone, Valuetronics and YZJ shipbuilding.

When the sheep are selling based on pessimistic news, there will always be other groups who are frantically buying due to the low valuations.

When the sheep are buying based on recommendations, you can bet that we will be frantically selling it off due to high valuations.

It seems so easy to buy low and sell high and in reality, it really is not that difficult.

All you need is you to put in the hard work and understand exactly what you are getting yourself into.

There’s no objective way of determining how much research is “enough” to constitute proper due diligence, but at least to me, having proper due diligence means you understand the:

1. history and competence of the management (fund or company)
   

2. main drivers behind the returns and associated risks
   

3. valuations and health of the balance sheet

So, ask yourself this, do you really know what you are investing in today or are you one of the much-needed sheep that contributes to market liquidity.

2. Focusing on the product but neglecting the strategy

The second most apparent issue that leads to investment failure is the tendency of investors to be too focused on the product itself as opposed to the underlying strategy.

While it is important to have a good grasp of the products or instrument itself (e.g. bond vs equity, ETF vs Mutual funds), ultimately what drives the returns of your investment is the underlying strategy itself.

Another issue that investors may have is the lack of understanding of what constitutes a proper strategy.

An example of this I’ve seen thus far is the belief that diversification is achieved by investing in multiple Robo-Advisors / ETFs.

While it feels like you are diversifying or “not putting your eggs in one basket”, in reality, you may not be.

You are not really diversifying your portfolio if there is a significant overlap / positive correlation between the products that you are invested in.

Unfortunately, more of than not, investors do not really understand the inherent behavior of the underlying investment strategies to be able to make an informed decision which results in poor performance.

3. Focusing on the strategy but neglecting the suitability

The final pitfall is the least obvious but most severe trait that leads to failure.

It occurs when investors have a clear understanding of the investment and strategy but lack the understanding of their own financial situation.

When that happens, two plausible scenarios may occur:

1. investing in unsuitable strategy thereby exposing yourself to unnecessary risks
   

2. investing in a suitable strategy but unable to commit to the investment plan due to failure to account for short-term cash flow needs

I realize that most of the time, people do know what they should invest in, but they often fail in their investment due to poor implementation that results in an inability to commit to an investment plan.

Time in the market is more important than timing the market, as investors, we should position ourselves in circumstances that enable us to buy low and sell high instead of being forced by circumstances to buy low and sell lower.

Bottom-Line

I think the quote from Sun Tzu summarizes very well why people often fail in their investments.

Do you know your enemy (the market)? If not, you may need to research more.

Do you know yourself? If not, you may want to spend some time quantifying your own financial plans and aligning it with your investment plans.

If you do not have the necessary time to learn about the market or quantify your own plans, you can consider employing my services.

Discover how you can leverage on my systems and process to plan for your retirement or investments here.

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Disclaimer:

This article is meant to be the opinion of the author and is for information purposes only.

This article should not be seen as a financial advice

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