A few investment mistakes and lessons learned

[Pendrainllwyn]

I have learned more than my fair share of investment lessons. I will share a few here in case anyone is interested.

1. My first major investment mistake was to buy an additional voluntary contribution to my pension through Equitable Life. We all know how that ended. The with profits fund was decimated. Lesson learned: Just because an institution (or an individual) is highly experienced doesn't mean they know what they are doing. The unit linked investments were better off. I remember when selecting them the salesperson told me that the US market was looking expensive and recommended I allocate nothing to the US (which I obediently did). Of course the US stock market has probably been one of the best performing since that date. Lessons learned: (a) If you are young (or even not so young) take a long term view. The US has outstanding companies, an enormous domestic market and a very shareholder friendly culture and (b) always think for yourself and if you don't know enough to think for yourself (as I didn't at that time) then do some reading.

2. My second major investment mistake was to buy a with profits endowment from Standard Life to pay off my mortgage; 25 years later it didn't come close. Fortunately I had long since paid off my mortgage through my own efforts. I made this decision before the folly of decision 1 came to light. Lesson learned: The profits on "With profits" products are more likely to accrue to the issuing company than the investor; better to buy transparent products where you can compute the return or do it yourself.

3. My third major investment mistake was I started investing in Asia based investment trusts. My view was that Asia was the future. The late 90's Asian currency crisis took care of that. Lessons learned: (a) Be geographically diversified (b) It can be painful to be right but early.

4. Another investment mistake was when I started investing in single name equities. I did all the fundamental analysis but only for the current period. This meant that cyclical stocks such as those whose profits are dependent on commodity prices looked really good value when they weren't if one took a "through the cycle" view. Lesson learned: Capture financials going back multiple years. Overall I did fine but it could have been so much better.

No doubt there will be more lessons to come in the future. Despite the above I consider myself in good financial health so I must have made a few good decisions along the way.

1. Reading. The Intelligent Investor by Benjamin Graham is for me a must read. I wish I had read it 20 years previously. Reading that helped me understand what type of investor I wanted to be and how I could go about it. Some other good books out there but that's a great starting point.

2. Viewing investing as a hobby that more than pays for itself rather than a chore. I see investing is an interesting intellectual challenge. I have learned an enormous amount and have enjoyed evolving my own methodology.

3. Make your own decisions. I don't buy based on stock tips. If one doesn't understand why something was bought then it will be complete guesswork knowing when to sell. I listen to others but assess against my own methodology.

4. Not trying to time the market. One of my best investments has been Vanguard Index funds. Money goes in every month by standing order through thick and thin.

5. Hold your winners. I used to invest in AIM stocks. Some went to zero and some multi-bagged. The thing is you can only lose 100%. You can win far more than that. One of several multi-baggers more than covered all my wipe outs in the global financial crisis. The best, Advanced Medical Solutions, I still have; a 37 bagger. But even there is an important lesson. A year or so after I purchased, AMS came out with strong results. I realised that confirmed my views on their prospects however I chose not to add because the stock had risen and I feared turning a winning investment into a losing one. Psychological nonsense. Had I added I would have had another 29 or 30 bagger. Since then I have often added to my position when good results have come out even if the share price is up on my initial purchase. If the price is up because of a commensurate increase in business performance then it can still be of good value. So whilst I didn't do that with AMS I have done it many times since and have ended up heavily backing businesses with strong business momentum, and equally not doing so for those without it, with positive results for my portfolio.

And a few personal ones

6. Living within my means. I have a good income but enjoy a relatively simple life. I don't feel a need to keep up with the Jones's. Expensive stuff doesn't make me happy but I enjoy it once in a while. Fortunately my better half is the same.

7. No debt. It makes someone else wealthy. I haven't been in debt for 20 years.

8. Start early, don't give up if you have some setbacks, and enjoy the compounding.

I hope something in there was useful.

Pendrainllwyn

[JuanDB]

Sage advice from hard won experience. Thanks for sharing. It’s a shame financial education is so poor that individually we learn from the same mistakes.

My eldest turned 18 a few months back and being a pretty sensible girl gained full access to her “savings”, along with a letter containing 20 pointers for managing her finances. At the time I wished someone had given me similar advice 30 years earlier.

Somewhat off topic, but...

Thanks,

Juan.

[Clitheroekid]

Excellent advice, and it reflects almost exactly my own experience - with the unfortunate exception of not having invested in AMS!

It should be compulsory reading for the `newbie investors' who crop up here from time to time.

[Raptor]

Like you I had an endowment policy with Standard Life and had paid down my mortgage so as not to actually need the "with profits" policy. The one good thing that came out of it was I still had it when they went public and got the shares.

Raptor

[Dod101]

What pendrainllwyn has set out is what I guess most of us go through in our investing 'career' and I am sure it will be very helpful to any who are in the early stages of investing. Only experience will educate but these comments may help shorten the period of education.

It is a hard won battle if, that is, it can ever be said to be won.

Dod

[OhNoNotimAgain]

To that list I would add one more:

Never, never underestimate the power of compound interest.

And from that flows two consequences:
Minimise costs
Maximise income

[Backache]

To that list I would add one more:

Never, never underestimate the power of compound interest.

And from that flows two consequences:
Minimise costs
Maximise income

Was that a mistake you made or a repeated aphorism?
The first point is important the second is not a logical step, compounding may be done by reinvesting or by retaining the earning within a company , the latter will often increase frictional costs thus negating your first aphorism