The Seven Habits of Highly Ineffective Investors
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Authored by Stephen Covey, The Seven Habits of Highly Effective People is one of the most remarkable bestsellers of all times. First published in 1989, the business and self improvement book has sold more than 25 million copies in 38 languages worldwide. The book has many important lessons for investors, and here is an adaptation of some these concepts.
Counterexamples can be even more enlightening than positive lessons, and it can be very useful to check our own behavior in search for serious biases and mistakes, so I decided to focus on the seven habits of highly ineffective investors as a compilation of mistakes to avoid when investing.
1. Be Hyperactive
Being proactive can be very useful when it comes to searching for investment ideas and doing in-depth research. We ineffective investors take this approach too far, and instead of being dynamic and proactive in research, we trade in and out of positions in an almost frenetic way.
Reacting to every comment or rumor as if it meant something crucial is a great recipe t to increase taxes and trading costs, and it can usually generate some serious mistakes by buying high and selling low. For this reason, hyperactivity in trading is one of the most important habits of highly unsuccessful investors.
Apple (NASDAQ: AAPL) is perhaps one of the clearest examples about that. The stock went from $400 at the beginning of 2012 to more than $700 by September; most investors and analysts were remarkably bullish about the stock at that level. Now that the price has fallen more than 25% to the area of $500, we hear all kind of arguments about why it will keep falling over the next months.
There are some genuine concerns regarding profit margins and other issues, but the important question would be: Is Apple, the company behind the stock, objectively worth 25% less? It most likely isn't, but when investors react to every piece of information as if it was a matter of life and death, they usually make a habit of buying high and selling low. Hyperactive trading is one of the more documented habits of highly ineffective investors.
2. No Need to Begin With the End in Mind
Some all fashioned books recommend that we should keep our return target and risk tolerance in mind when making investment decisions, but that's really not necessary anymore. We ineffective investors have only one thing in mind; making lots of money quickly so we can brag with our friends about it.
Investors nearing retirement are supposed to be better served by focusing on high quality, stable and dividend paying companies like Coca-Cola or Johnson & Johnson, which have consistently raised their dividends for decades, operating in businesses with little cyclical risk and paying juicy dividend yields of 2.7% and 3.5% respectively.
But that's too boring for us ineffective investors; we only invest in the most explosive companies with exciting potential for big returns, even if the risk is too high considering our income needs and investing timeframe.
Netflix (NASDAQ: NFLX) may be facing profitability problems over the next years as the company invests heavily to acquire content, and competition in such a dynamic sector may be a reason for concern. But they are the pioneers in video streaming, which is a business with tremendous potential. The company may not be the best alternative for investors with a low risk profile, but it’s certainly more fun to talk about than Coke or Johnson & Johnson, so we go all in on this volatile name.
3. Don't Put First Things First
Starbucks (NASDAQ: SBUX) may be a great company with a very valuable brand, an innovative management team and plenty of opportunities for growth via new products and emerging markets exposure. However, the fiscal cliff is coming, so we would never buy Starbucks.
Focusing on the most important determinants on long term stock performance is not something we ineffective investors believe in. We find plenty of excuses in general macroeconomic problems or other secondary considerations when it comes to making, or avoiding, investment decisions.
4. Think Win-Lose
It's not the return we make what gets our attention. We want to make money while other people do much worse, preferably losing all their capital in disastrous investments. We don't share investment ideas, and we certainly don't help other investors with any specific knowledge we may have about an economic sector based on our professional experience. We like winning, but only when it means that other investors will lose.
5. Understanding is not Necessary
Understanding business fundamentals, economic trends, corporate strategies or other investors' points of view is a complete waste of time. We ineffective investors like taking as much as possible; listening is not only unnecessary, but also completely boring.
6. There is no Such Thing as Synergy
Investing communities, message boards, and social networking are a complete waste of time. Teamwork is completely useless; we ineffective investors would never believe in such a ridiculous concept as synergy.
7. Do not Sharpen the Saw
Learning, investigating and doing in-depth research is another infamous waste of time. We know everything we need to know, and the business world is completely static and never changing, so there is no need to dedicate time and effort to such a dull activity as improving our skills and education.
acardenal owns shares of Apple. The Motley Fool owns shares of Apple, Johnson & Johnson, Netflix, and Starbucks and has the following options: short JAN 2013 $47.00 puts on Starbucks. Motley Fool newsletter services recommend Apple, Johnson & Johnson, The Coca-Cola Company, Netflix, and Starbucks. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!