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What my mom taught me about investing

Stop tinkering: While keeping an eye on your investment portfolio is essential, don’t get carried away and overtrade, warns Nathan Kowalski

We all likely have some great quotes and lessons we learnt from our mom while growing up. Here are a few quotes from my mom that you can apply to investing.

1. Look both ways before you cross the street!

In this case she meant consider both the good and the bad aspects of an investment. It is unwise to potentially walk into oncoming traffic or in this case rush into an investment, without first considering all the risks and potential rewards. Take your time to truly understand the investment (structure, costs, taxes, management, etc), the story behind it, and the possible downside before making an investment.

2. Keep crying and I’ll give ya something to cry about!

One common saying in investing is “you’re only wrong if you stay wrong”. Essentially, if you want to become a great investor you need to develop a strategy to protect yourself when you are wrong. The important thing is to limit your losses so they don’t become so large that they are statistically near impossible to overcome. Just ask anyone who owned Valeant. One way to do this is to create signposts. As discussed in the previous paragraph, you should know why you liked the stock or index in the first place. In the case of a company stock you might believe margins in the industry are going to expand, thus leading to improved profitability and a higher share price. If margins do not expand over a given timeframe the signpost will help you identify where you could have gotten an investment wrong. And then hopefully you don’t end up having something that really makes you cry. Also make sure you are diversified so one bad investment can’t bring you to tears.

3. It looks like a tornado has swept through your room!

One thing I see from time to time is a scattered portfolio. Some investors feel it’s a good idea to ‘spread it around’. They have a shotgun approach where investments of various kinds are allocated amongst a series of managers and strategies. This, in itself, is not such a bad idea as it can help in diversification but if you do not do a good job of monitoring your investments and consolidating them at some level then you might be holding onto an inappropriate mess. Make sure you have a way to consolidate all your investments in a form where you can measure your overall exposure, allocations and risk. Stay organised.

4. If everyone jumped off a cliff would you too?

One common mistake made by investors is to follow the herd. But running with the herd can often get you trampled if you’re not nimble. Successful investing often requires one to be contrarian. If you read it in the front page of the Wall Street Journal it is probably too late to profit from it. Stay focused on your own strategy and ignore the “talking heads” on television.

5. If you’re gonna kill each other, do it outside! I just finished cleaning!

We all like excitement. Speculation in investing is sometimes hard to resist, so why fight it? If you are going to speculate, set aside a small amount of your portfolio as a way to have some fun without killing your serious investment goals. Keep it separate from your core investment strategy and limit it to 10 per cent of your overall portfolio. Do not “add” to this portion when it’s down. Have fun “outside” of your long-term investment goals.

6. Shut your mouth and eat your supper!

I can’t tell you how many times I have heard people talk about how they are going to start saving more or what they are looking for to get into the market. Yet it’s all talk. Stop talking and sit down with your financial advisor to develop a plan. If you are waiting for the world to look perfect you’ll be dead first. It would seem more important than ever given our current environment of low yields to really get busy now.

7. Stop squirming and sit still!

Overconfidence is a common trait found among investors. It is a behavioural bias often exhibited by overtrading. Activity for activity’s sake is not investing. Staying true to a long-term investment plan helps prevent investors from being whipsawed by passing fads. Constant tinkering of portfolio allocations and positions only drives up trading costs and increases inconsistencies. This doesn’t mean you should stop monitoring the portfolio but it makes sure you look at it from an overall level so you don’t fiddle with parts that make you blind to the big picture.

Mother does know best. Happy Mother’s Day mom!

Nathan Kowalski CPA, CA, CFA, CIM is the Chief Financial Officer of Anchor Investment Management Ltd. and can be reached at nkowalski@anchor.bm