Nothing sepcial just thought some of you may like some reading/reassurance.

Golden rules for losing money

In the first of two articles, here we explain the classic investment mistakes that, to be successful, you should avoid at all costs.

Investing successfully poses many challenges. In these pages we aim to show you some of the techniques that can help you to rise to these challenges but first, one of our favourite tools, from mathematician Carl Jacobi.

He was fond of saying, 'invert, always invert' and that's what we're going to do, here and in our next issue. Instead of looking at how to make money, we're going to look at great ways to lose it. That way you can aim to minimise your mistakesa vital part of investing successfully.

So here they are, classic investment mistakes guaranteed to ensure woeful performance.

1. Trade fast and trade often

Charlie Munger, Warren Buffett's business partner, often refers to the huge mathematical advantages of 'doing nothing' to your portfolio. Let's blindly ignore the very large tax benefits of holding stocks for the long term and just consider the impact of brokerage.

Someone who 'turns over' (buys and sells) all the stocks in their portfolio several times a year is at least a few percent behind the eight ball, even with internet brokerage rates as low as 0.3%. Add up the brokerage from your last tax return to see what we mean.

There's also an important, but less measurable, benefit to taking a longer-term approach. It makes you think long and hard about which stocks to include in your portfolio. When you are considering buying a stock for 10 years or more, you tend to pick quality businesses. And that can only be a good thing.

So, if your intention is to lose money (and enrich your broker), trade fast and frequently.

2. Follow the mainstream media

Hopefully, your subscription to The Intelligent Investor inoculates you somewhat against this particular human folly, especially after reading our cover story last issue. Most people, though, aren't so resistant.

Munger refers to a human condition known as 'incentive-caused bias' and it explains the functioning of media quite nicely. There's a widely held belief, and it may be correct, although declining newspaper circulations suggest otherwise, that emotional, confrontational, dramatic coverage sells more papers than rational, factual reporting. Hence the tendency to induce panic in investors when calmness would better serve their interests.

But incentive-caused bias doesn't just affect the media. Just look at how honest managing directors can first convince themselves, then their board, then their shareholders, how an offshore acquisition or hostile takeover will be great for everyone, especially themselves. Generous options packages offer a fitting explanation for many examples of corporate foolishness.

To lose money, avert your eyes from a factual assessment of a situation and bury yourself in the opinions and arguments of those with a vested interest in convincing you of the veracity of their own opinion.

3. Follow fads or 'hot stocks'

In his highly recommended book Influence: The Psychology of Persuasion, Robert Cialdini talks about another human condition known as 'social proof'. The evolution of the human species, and sheep, was greatly assisted by a tendency to follow the crowdsafety in numbers and all that.

Anyone who thinks that social proof is solely the preserve of the historian should study the mania of the dot com boom. Millions, gulled with the fear of standing apart from the crowd, played a huge role in firing the mania. Conformity still dictates many areas of life but following the stockmarket crowd can be a costly mistake. As Buffett says, 'you pay a very high price in the stockmarket for a cheery consensus.'

That's why we are most often excited when others are depressed and fearful when others are optimistic (see our review of FKP on page 6). And it explains why we're worried about China, nickel stocks and other areas like the spate of listed investment company floats that are currently running hot.

If you're intent on seeing your net worth dwindle, follow hot stocks and sectors.

4. Beat yourself up over lost opportunities

Here, you might want to refer to our cover story from issue 135/Sep 03, 'Right decision, wrong result'. In an imperfect activity like investing, mistakes are absolutely inevitable. But, odd as it may sound, sometimes even when you're right, you're wrong.

To call tech stocks overvalued in mid-1999 was undoubtedly correct. But for the next six months, as speculators pushed prices higher still, it sure didn't feel correct. It's a fact of life that someone will always be getting rich a little quicker than you are. But then again, they may become poor just as quickly by adopting the same approach.

If you take the conservative decision not to invest in a stock, and it goes up anyway, don't fret. Just be patientother opportunities are often just around the corner. But if you are interested in blowing your capital, now's a good time to capitulate and buy at these higher prices.

In next fortnight's issue, we'll look at some more 'Golden rules for losing money'. Try and save your pennies 'till then.

Sourced from The Intelligent Investor.

Good article, Stockpanther - is it your own work or have you sourced it from somewhere? I note that The Intelligent Investor is mentioned in the article. If that is your source, it would be a good idea to give them credit as we don't want any backlash against the forum or accusations of plagiarism. As a student, I'm sure you are only too aware of the need to reference your sources adequately. Please edit your post to include your sources, and make sure you are allowed to reproduce any articles you have sourced.

Judy

yes, I agree with Judy, and note that some sources don't alow mirroring/ cop and pasting - The AFR is one.

Thanks for pointing that out, I thought I did credit the author at the end....obviously forgot....editing it now.

Hmm can't provide a link cus it doesn't show up in address bar, but this article was made available for open viewing so authorisation shouldn't be a problem.

Thanks for that Stockpanther,

Some quotes from Warren Buffett

.The future is never clear you pay a very high price for cheerful consensus

2. Be fearful when others are greedy. Be greedy when others are fearful

3. The most common cause of low prices is pessimism sometimes pervasive sometimes specific to a company orindustry Do business not because we like pessimism but we like the prices it produces

4. He considers the stock market does not exist
it is there as a reference to see if anybody is offering to do something foolish

5. Best returns are from companies producing the same product or service for a number of years undergoing major changes increases the liklihood of committing major errors He learned not to solve business problems but to avoid them

7. Has anyone done anything foolish lately that will allow me an opportunity to buy a good business at a great price

8. An investment is one which upon thorough analysis promises safety of principal and a satisfactory return

9. When people are greedy or scared they will often buy or sell at foolish prices

These were obtained from the book "Buffettology"

Hi stockpanther,

Yes, an interesting article (presumably from The Intelligent Investor) but I felt that it suffers from the usual "our way is right, all other ways are wrong" bias that pervades most financial commentary. In this particular case, the author is biased towards long-term, buy-and-hold, value-based investing, and against short-term trading. This bias clearly shows as he makes several dubious claims:

[1] "(Don't) Trade fast and trade often" - First, no evidence is cited for the implied claim that one will make less money by trading more often. My experience suggests there are many "fast traders" who consistently make very good money. Likewise, there are "slow fundamentalists" who fail to make money. And of course there's a whole range in between - after all, that's what makes a market. It's very common for the "fundamentalist" crowd to claim that traders don't make money, and vice versa. I'm just getting a little tired of reading it.

The argument about paying more brokerage is specious - after all, this is a simple business cost that any trader worth his salt will have already accounted for. If a trader knows that he can make twice the profit by trading twice as frequently, then paying twice the brokerage is a very small price to pay for that extra profit.

The claim that if you are buying for the long-term you will therefore think harder about your purchases seems, to me, to be insulting to the many active traders who think VERY long and hard about what to buy and sell, and when.

And finally, the claim that the long-term investor will tend to buy "quality businesses" is irrelevant; as long as one makes money, who cares if it is via quality businesses or fly-by-night penny dreadfuls? In fact, if a trader can make more money buying poor-quality businesses, then he would be a fool not to do so, wouldn't he?

[2] "(Don't) Follow the mainstream media" - The warning not to "bury yourself in the opinions and arguments of those with a vested interest in convincing you of the veracity of their own opinion" would seem to apply even more to The Intelligent Investor than to any of our mainstream media!

[3] "(Don't) Follow fads or 'hot stocks'" - This is just bad advice, from a trading point of view. Fads and hot stocks provide excellent ways to make money. The much-maligned "tech boom" provides a case in point. That boom lasted five years! Even long-term investors could have made large amounts of money by buying MSFT, SUNW, NTAP, etc. etc.. Many people made fortunes buying the tech stocks. The key, of course, is knowing when to sell, but there were plenty of signs when the party was over. The author of the article appears to be confusing "being right" with "making money", a mistake that successful traders do not make.

So, there's my take on the article. Just for the record, let me state that I remain totally agnostic on the "fundamentalist" versus "short-term trader" issue. It seems obvious to me that there are a myriad of ways of approaching the markets, and of making money therein. Anyone who claims to know "the one true way" should be treated with suspicion. Personally, I aim to learn as much as I can about all the different approaches to the market, with the aim of becoming equally bad at all of them!

Cheers, Staybaker.

Good post Staybaker, it's always good to see the other side of the coin.

You are right, a short term trader would see much of that as rubbish.

It appears to me that many of the investors on this forum are fundementalists, and do look more towards long term holdings.

As much as I hate to say it, I don't like seeing red in my loss column at all...not necessary to the level of Barbara Streisand who described herself as 'taurus the bull', but we'd all rather be in the black.

With ION I've caught quite a bad run quickly since I bought, I'm definately not going to sell...but I find that reading articles which reinforce my investing style allows me to keep my mind/psychology exactly where I want it to be. I don't want to divert from my original investing style in the face of short term losses, and being an inexperienced investor I think working hard on my psychological state of mind is extremely important (infact in my case it is possible that this is my greatest weakness).

I also often look at stock charts...those that have possibly crashed 20% then went on an excellent run of perhaps up to 100%, just to reinforce my investing approach in my mind and keep telling myself a 10% or 20% or any loss is inconsequential providing I am still happy wiht the value I am getting for my money.

Many may see this behaviour as stupid...but for my thought processes I believe this consistent reinforcement is crucial as it allows me to continue to be confident in my original and objective assessments of the company, its future prospects and share price and how this related to my investing strategy.

mmmm....I appear to have diverted off what I was trying to say...I posted this article more as a reinforcement for those adopting this style of investing as I think it's good to hear positive commentary in regard to your style as it helps to ensure that you continue to stay the course you originally set out to achieve.

Some may need it, others won't...guess we are all different.

Once again it was a good alternative view from a traders perspective staybaker.

G'day Stockpanther,
You are on the right track , and none of us like the red ink however, its a fact of life you can't pick how the market is going to price your shares, regardless of a company's fundementals

Once you become aware that what goes up can also go down its funny how a $10 loss on a racehorse causes more angst than a $10000 loss on a portfolio in one day.

I guess its its all in the mind.

There is an old punters saying:

Lose money lose nothing, lose confidence lose everything.

If you have done your research, and are happy with the fundementals hang in there.

Thanks for the insight Pedro.

I'm sure with time i'll continue to develop that side of things as I gain more exposure to the unpredictable nature of shares.

I can also envisage a number of instances where that saying would be right on the money too.

Hi stockpanther,

Excellent response! (I was worried that you might take offence to my previous post ...) You clearly have an attitude and approach that belies your years, and will no doubt stand you in good stead. (I only wish I had started my investing career at a much younger age.)

Your point about reading articles that reflect your investing style is a good one. Positive reinforcement for one's approach is a very, very valuable thing, and I believe most people pay too little attention to it (not just in investing, but in all aspects of life). At the same time, one needs to guard against closing one's mind to alternatives. That is one of the huge challenges of trading and investing, since there are never clear-cut right and wrong answers to anything (hence my complaints about the original article).

Anyway, good luck with your investing! And continue your posts, they are very informative.

Cheers, Staybaker.

PS: I reluctantly sold my ION holding last week, taking an unpleasant loss.

Just having a trawl through old posts and can add another quote

Take care to sell your horse before he dies. The art of life is passing losses on. - Robert Frost

Some of his other quotes
http://www.brainyquote.com/quotes/authors/r/robert_frost.html