Most Common Mistakes
This is an article I had in mind since I began the series. There’s an infinity of possible mistakes an investor could make for which, the difficulty relied in compelling them into the actual most common ones. Therefore, we’ll be discussing the three most common mistakes I think could be made. I made them all, so I’ll be commenting them and hope we learn something.
Not understanding a business
It’s very common to think one knows what a business does but, as experience has revealed, businesses have actually much more going on with them than the facts we know before researching them. By not doing so, an investor is subject to the possibility of ignoring the existence of other business units, not correctly knowing the financials of each product, etc. This in turn, affects the whole financial appraisal of the company. It has happened to me with:
Nvidia. At start, I ignored the fact they even had a Data Center and this business unit produced a really high % of the company’s revenue.
Microsoft. Not properly researching a company “everyone knows what it does” made me ignore the fact the business unit “everyone knows they have”, just represented 15/20% of the company’s sales.
The adverse effect not understanding a business has, is under looked and lowkey. Consequently, you will not be capable of understanding their quarterly results and your whole view will be incomplete/biased. This turns impossible making a decision on whether you buy/hold/sell its shares, since you actually can’t properly judge.
Not Paying Attention to History
This one comes in hand of two things:
Past events not necessarily occur again but a sure damn thing is that a very high number of variable’s combination has existed in history. This makes the possibility of a future event being similar to a past one, an actually higher probability event than it is thought so.
“History doesn’t repeat itself but it often rhymes”
Times exist where the market goes crazy and assign a high probability of occurrences to unlikely events. At such times, the known extremes of the pendulum are at play. In 2020 and part of 2021 we lived one of those times.
The adverse effect this has is obfuscating your sight. One very tangible mistake at times like this is overpaying for something, ignoring the fact a bear market will come or things will eventually return to the mean. Not necessarily everything is overpriced or under-priced in the extremes of the pendulum, but the current mean of the market is drastically far from the historical mean, which may cloud one’s judgement. And, the tangible consequence of overpaying is no positive returns for as long as the payment was overdue (may be many years).
This has happened to me in two completely different occasions:
I paid several ten times earnings for mature companies in 2020/21 thinking they would never come down. I paid like 70 times earnings for Disney for example (that´s a 1.4% yield!!!!!!!!!!). The same thing happened with growth companies; I paid like 35 times sales for Shopify.
The transition from 2021 to 2022 was a brutal one. We went from sky high multiples to really low ones. This made me think I was now buying at ‘fair’ prices when the bear market was FAR from over. The associated tangible mistake with this is trying to ‘time the bottom’.
In both occasions, as easy as it sounds, an investor can just wait or DCA if that’s the strategy he/she follows, of course, but out of this article’s scope. Just by looking/studying history, in the first scenario I could have simply waited for more rationale valuations (they historically always came). Similarly, in the second scenario I could have simply waited, what is low can always go lower and a bull market will eventually return.
“The advantage an investor has but has to acknowledge it, is that only he decides what price to pay for something”
Being Half a Businessman Expecting Half the Profit
A lot of agents participate in the stock market. This means that there are people that:
Read all day, research all day long and have done so for decades.
Have trading algorithms ‘perfectly’ oiled up.
Are professional traders who dedicated their whole life to maximizing their skill at this discipline.
People that do these things correctly are the ones who outperform the market. As in all, there are no grays.
“99% of the whole work is useless but it is needed to get to the 1% that’s worth”
In this world, an investor cannot do half what these outperformers do expecting half the return they have. That’s where underpeformance is. It’s in the completeness of their job where the outperformance relies, not in the underlying task they perform.
Again, committed the three sins.
Personal Commentary
There’s no shame in making mistakes, they are part of human life and every investor commits them. It is upon you to either learn or stay wrong. In the stock market, I’d choose the first option or you’ll just get indefinitely wrecked by this creature.
I’m currently working on the next research article, which will be about Mercado Libre. Hope to get it done by this Wednesday. If not, expect it for next Wednesday. Haven’t decided which company to cover afterwards ,but will probably be Nvidia, Tesla, Microsoft or Google.