'My ideal stock is one where things have gone wrong in the company, but it looks as if things are changing'(Anthony Bolton, Fidelity Investments)
Case Study
Now pay attention and learn from my mistakes! I opened an internet sharedealing account about a year-and-a-half ago. As an internet journalist I thought I ought to test out the services I write about. I invested a relatively small amount in a couple of technology-related investment trusts. In about three months I'd doubled my money.
This investing lark was a piece of cake. Shares only seemed to go up, never down. So I invested some more and bought more technology stocks - companies I thought I knew about.
The internet is undoubtedly changing the way the world works and communicates. It is a major revolution and those companies that are making that revolution happen are going to be massive. That was the investment philosophy, anyway. Then came the first sharp correction in about March 2000. Technology companies both sides of the Atlantic had become ridiculously overvalued. The bubble was about to burst. But did I sell? Did I hell! Strange psychology comes into play. When prices are falling you always think they'll start rising again soon. When they're rising, you always think they'll continue doing so, even if you've already made a tidy paper profit.
I invested more - more than I could afford to lose, another classic investor mistake - and became addicted to the daily excitements of live share prices, sometimes swinging 20% throughout the day, and 'real-time' online dealing. And that's the potential problem with internet dealing. It can become addictive. It's there on your computer screen just a few mouse clicks away. And so you dabble when you should just leave well alone. You're tempted to think more and more short-term when novice investors like me should be thinking about investing for five years at least. Each time you deal, the stamp duty and dealing charges eat away at your capital. The sometimes very wide bid-offer spreads (the difference between the buying price and the selling price) leave you sitting on a loss as soon as you've bought. If the price than falls, your losses are instantly compounded. You panic and sell - you're capital is further eroded.
To cut a long story short, I broke every rule in the investment handbook, including not taking profits when I could. The result is that, along with the rest of the technology sector, my original capital has been decimated. After investing for a year-and-a-half I'm poorer, but hopefully wiser.
These are the lessons I've learned so far. They may seem obvious, but you'll be surprised how difficult it is to do the obvious:
- Decide clearly whether you are a short-term, speculative trader or a long-term investor. Don't fall between two stools.
- Impose stop losses and stick to them rigidly - protect your capital at all costs.
- Never try to guess the bottom of a falling market.
- Don't be afraid to sell up completely and go to cash occasionally.
- Be patient and wait for investment opportunities. Don't dive in at the first opportunity without thinking.
- Take profits when you can and don't be too greedy.
- The trend is your friend - in other words, don't try to beat the market. If it's going down, you probably will, too.
- Don't become obsessed with your favourite stocks. There's not much room for sentiment in investing. Diversify your portfolio across different business sectors so that you're not putting all your eggs in one basket.
- Buying shares solely based tips reduces investing to the level of gambling. Do your own research and follow your own hunches.
- Consider other ways of investing, too, such as unit trusts.
