The 5 Mistakes Every Investor Makes and How to Avoid Them
Investing is simple unless we complicate it.
This is the message at the core of Peter Mallouk's new book The 5 Mistakes Every Investor Makes and How to Avoid Them. The author highlights the point that what you shouldn't do is just as important as what you do when it comes to the world of investing.
We at Trading Education believe that regardless of whether the reader is a beginner who's just getting started in the investment world or a financial expert with years of experience, Peter's book and his advice will provide all audiences with something to think about.
Mallouk, who works as an asset manager in the United States, claims that there are five key mistakes that a lot of investors make and that these investment mistakes are detrimental to the performance of their portfolio:
- market timing,
- active trading,
- misunderstanding performance and financial information,
- allowing your emotions and biases to get in the way of your process, and
- working with the wrong advisor.
The author also makes the point that most investors try their best to time the market, despite investing heavyweights like Warren Buffet and Benjamin Graham saying that market timing is among the biggest mistakes that investors can make.
Peter claims that those investors who claim they can time the market are either lying or that they're simply plain wrong.
New investors should think twice before buying into such claims, and being able to avoid this line of thinking will result in an investment career that could be very successful.
Basically, the best time to invest is today.
The author advises against active stock picking and rather recommends investing exclusively in index funds. There are a number of studies that show that almost every other form of investing, be it mutual funds, hedge funds, endowments and so forth has lost out to index investing when it comes to returns.
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Peter doesn't explicitly mention the success of the investors who have consistently outperformed stock market indices though, although he does quote some of the more successful names in the investing business. Mainstream investing names such as Peter Lynch, Warren Buffet, and Benjamin Graham are all mentioned, but the author does stop short of claiming that an investor could simply follow the investing philosophy they use to succeed.
What this suggests is that either the author believes the nuances of stock picking is beyond the level that most readers of this book will be operating at, or that the philosophy would go against his message that active investing isn't the route to take. Regardless, Peter could perhaps have done a better job of covering the active trading section of his book.
A real positive of this book is the way it captures the problem of investors taking financial news provided by news channels as being worthy of acting upon. Television news channels are generally run as for-profit ventures, where the number of people watching is paramount. For this reason, they tend to sensationalise news in an attempt to draw in viewers, which isn't always to the benefit of serious traders.
The author recommends that traders suppress the instinct to act based upon advice provided by news channels who are operating with a different agenda than investors. Providing the most relevant information isn't their most pressing task, drawing viewers is. Remember that.
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The book advises investors that taking the advice of fund managers whose performances have been advertised isn't the best option and that further research is always recommended to ensure that performance claims are being provided in the correct context.
Emotional factors play a huge part in investing, and fear, greed, and regret will impact every investor at some point during their career and can be responsible for causing the investor to buy or sell at the wrong time. While behavioural biases such as overconfidence have been known to influence the actions of investors, this book provides solutions such as well-disciplined approaches.
The author goes into detail and does a terrific job of explaining the mental bias issues very well, which should give the reader pause for thought.
Another important issue that Peter Mallouk deals with in his book is the unchecked rise of financial advisors, who have done more harm than good for a lot of investors. The stories of financial advisors misselling high-commission products to unsuspecting investors are sadly all too common, and the advice that the author gives to investors to check custody of money, conflict of interest and competence before working with any financial advisor is invaluable.
Wrong custody of money can lead to situations like we saw where investors ended up caught in Ponzi schemes like that orchestrated by Bernie Madoff. When advisors start receiving commissions for sales and recommend financial products based on this fact, they cross the line from unbiased, neutral advisors acting in their client's best interests to salespeople.
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Financial advisors aren't required to undertake any formal training, and as such investors should take care before appointing one to work with them. The author suggests some sensible steps for investors to follow, which should help reduce the chances of choosing the wrong advisor.
The book also discusses what investors should be doing, including some advice on looking at index investing, and spreading their investments across different asset classes, such as the US and international equities, bonds and real estate. Peter also makes the point that investors should consider not investing in asset classes that can diminish returns, such as cash and gold.
Originally published in 2014, the book is one of the few to cover the 2008 financial crisis when reviewing historical analysis, showing that throughout history we've seen crisis hit, only for recovery to follow.
There is much to be taken from the section on all-time high prices, where the author makes the point that it's naive to expect pull back every time stocks reach an all-time high.
He makes a comparison with the prices of everyday items, such as soft drinks and candy bars, saying that we don't expect prices of items like these to correct themselves whenever they hit an all-time high.
The markets work in the same way.
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The 5 Mistakes Every Investor Makes and How to Avoid Them is an easy-to-read, insightful book that is thankfully lacking in jargon and confusing statistics.
As well as keeping things simple, the author has quoted studies from some well-recognised sources such as Vanguard, Morningstar and a number of universities, presenting their findings in an easily digestible way.
This book is a good purchase for both the beginner investor and experienced market reader alike, providing a blueprint for novice investors to follow, and asking some interesting questions that will have experienced investors perhaps questioning some of their recent choices.
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