DIY Investor Magazine
/
2015 Issue
32
CLASSIC INVESTMENT
MISTAKES AND HOW TO AVOID THEM – PART 3
Frederik Vanhaverbeke
In Part 3 we discuss two more common buying and
selling mistakes among investors.
Selling winning stocks and hanging on to losing stocks
is like cutting the flowers and watering the weeds.
Peter Lynch
MISTAKE 4: REFUSING TO SELL POORLY
PERFORMING SHARES BELOW THE PURCHASE
PRICE
Peter Lynch, one of the most successful fund managers
ever, who achieved an average annual return of 29%
between 1977 and 1992, believes it’s wrong not only to
sell winning shares but also to hold on to losing shares.
In fact, many investors refuse to sell shares that are
performing very poorly, especially if their price drops
way below the purchase price. This is due to a range of
psychological biases. As long as the share is not sold
the loss remains virtual and the investor can continue to
cherish the hope that everything will turn out well in the
end. Many investors are also transfixed by the purchase
price, which seemed so advantageous to them when
they bought that they therefore take the view that
the share has to be cheap if it is trading far below that
purchase price. Some also think that a share whose
price has plummeted can’t fall any further and that it’s
set to recover, just as a compressed spring bounces up
when it’s released.
Although these arguments seem plausible at first sight,
they’re all ultimately irrational.
Common sense says that it’s wrong to stick with a
share that’s rightly been slashed in value and where an
objective evaluation of the situation leads but to one
conclusion: that the company probably won’t rebound
again quickly. Poorly performing companies should fall
on the stock market and if its stock takes a punishing
and appears cheap, with no improvement in sight,
there’s a big chance that the share price could be hit
even harder.
Those who continue to sit on a loss position with no
clear prospect of improvement run the risk of having
to incur even bigger losses. Obstinately holding on to
positions because they don’t want to take a loss has
cost countless investors dearly!
MISTAKE 5: STOCK MARKET TRADING WITH A MIXED
STRATEGY
Beating the market isn’t easy. It can nevertheless be
done in a number of ways.
Some traders have raked in astronomical returns
by momentum trading; top trader Richard Dennis
managed to turn $400 into $200 million over 15 years
by trading in futures.
Others proved their mettle in macro investing –
generally buying all kinds of assets (shares, bonds,
currencies, derivatives, etc.) Across the whole world
based on fundamental analysis and economic and
political considerations. George Soros, probably
the most famous macro investor, has achieved a
phenomenal annual return of more than 26% over a
period of 40 years.
Another way to beat the stock market is to invest.
Investors try and determine the intrinsic value of shares
with the aim of buying those that are trading (far)
below their intrinsic value and selling them again once
they’ve risen to their intrinsic value. Warren Buffett,
Peter Lynch and Shelby Davis, below, are just a few
examples of successful investors.
The fact that there’s no single way of beating the
market doesn’t mean, however, that various methods
can be jumbled together.
As was revealed by my survey of investors and traders,
each of those highly successful market players is
backed by a certain philosophy that explains how the
