Eight fundamental mistakes of investors

A potholder for an investor
For an investor who knows that he will eat what he cooks and does not want to get burned About the author: Matthew Maly has been working as a personal investment consultant for 10 years.
He is the author of three books and more than forty articles, a regular television commentator for the English service of RIA Novosti. Prior to that, he worked for several American investment funds, Renaissance Capital and Deloitte. For a year and a half he was an expert at the Ministry of Economy of the Russian Federation. He graduated from two prestigious American universities, Columbia and Yale.

If you do not follow any rules, investments can be both very profitable and very unprofitable. You can accidentally guess with the company by investing in "some Apple", as the hero of the wonderful American film Forrest Gump accidentally did, or you can lose your last shirt by investing in such a "pillar of the American economy" as General Motors. But investing in the securities market is not a lottery. If an investor avoids what we will call the fundamental mistakes of investors, then statistics show that investments always bring profit. We will talk about these mistakes.

1. Misunderstanding of the role of moneyThere are two good reasons why investments simply need to be made:

1. Money stored under the pillow loses its purchasing power due to inflation. Interest on a bank deposit can cover inflation, but deposits that promise income in Russia are usually associated with unjustified risk.
2. By itself, money is nothing: it reveals its value only when we spend it on what we need, that is, we fulfill the goal set for us. Goals are like momentary (buy bread) and defining all life (to ensure a comfortable old age, to save up for the purchase of housing, to educate children). To achieve these important goals, a lot of money is required, they need to be saved for a long time and at the same time it is necessary to make sure that the deferred money not only loses its purchasing power from inflation, but on the contrary works for you, brings profit. This means that investing is a vital necessity.

Misunderstanding the role of money is a very common mistake. Investment goals must be formulated, and money must be invested to achieve them. Of course, when we buy bread, we do so, we just don't realize it.

And since it is necessary to make investments, let's do them correctly. So, we have seven more investor mistakes to discuss:

2. Investments should be diversified. Let's start with the fact that Russians understand investments not at all what is understood by them in the West: it is ridiculous to advise a Russian businessman to buy a store in Khabarovsk if his dad is the mayor of Chelyabinsk.

But this is not an investment, but the use of personal connections, and here business is conducted according to other laws.

Diversification is the right way of long–term investment in securities for a person who has access to various financial instruments at the same time and who does not have insider information. Diversification depends on many factors: the qualifications of the investor or his adviser, the level of desired income, the period of time during which the money will be invested. Roughly speaking, highly qualified investors who are ready to monitor exchanges around the clock are engaged in derivatives; those who want to sleep at night invest in stocks, those for whom investments are not the main source of income are engaged in stock funds, and grandmothers should take their money to a guaranteed bank deposit.

My clients are those for whom it is ideal to engage in equity funds, and we diversify the portfolio by countries, industries, currencies, and instruments that the fund uses, investing in both conventional and hedging funds. At the same time, it is important to remember that diversification cannot be based on a single "platform". For example, it is impossible to create a diversified portfolio consisting only of Russian stocks, because such a portfolio depends very much on the situation in Russia and on the price of oil. Also, the portfolio of shares of Russia, Saudi Arabia and some oil company will not be diversified. Diversification is the selection of tools that move independently of each other, and it is done in order to get a more stable average result.

And of course, the main component of diversification is the long–term investment. Time is the most important factor, and this reminds us of another rule.

3. Investments must be made for a certain period of timeAn investment is when you invest money, and then you get more (and sometimes less) money.

But money is nothing until you have made a purchase with it, because only making a purchase gives money the opportunity to show its usefulness. So, investment is the accumulation of money to make an important purchase. Such an important purchase can be providing yourself with a pension (then you need to invest until the expected retirement age), providing a child with higher education (then we invest until his eighteenth birthday), and so on. Here, investing is directly connected with life planning: it is stupid to buy an investment instrument that ends when you are 45, and then retire at 50.

But if time is so important, maybe it's worth playing with time: investing when the market is growing and selling when the market is falling? Statistics show that this is one of the biggest mistakes an investor can make.

4. Not grabbing what's hotOften investors rush to something that has been growing very well.

At first, it grows, then the investor notices it, then he begins to think, then for the first time he is told that he is a fool for not investing, then everyone around has already invested, only he is left, then he invests – and everything collapses. No wonder my newsletter is called "A potholder for an investor". First of all, do not get burned.

You can't invest money based on what happened: Your investment income is a function of what will happen. A talented investor tries to predict the trend, and to invest money one of the first; he will never invest when everyone has already invested.

Moscow real estate is a good example. Of course, those who bought an apartment a few years ago and managed to sell it before the crisis, earned great money. But some MMM investors also made good money. However, those who did not have time to sell may face significant losses. And they will surely ask themselves: "How could I believe that Moscow real estate is almost the most expensive in the world? Does the Russian economy really have such prospects and such stability that this price implied?"

5. Don't chase the market Trying to guess the direction of the market seems like the right strategy, but statistics convincingly show that it is almost impossible to do this.

If we take a short period of time, then market movements are not always logical and depend on too many factors. As for the long-term period, it turns out that those who tried to escape from small falls often missed a big increase.

Here is an example. Take the S&P 500 from January 1995 to December 2007. During this time, it has grown by 300%. And what would be the growth if the investor simply missed the month of the greatest growth each of these years? Only 77%. The only way not to miss these rises is to constantly, and in cold blood, stay in the market. In this case, according to statistics, the investor always receives an income several percent higher than inflation.

6. Invest without emotionsIn cold blood?

Did we just say that we need to invest in cold blood?? But how so? After all, there is a crisis in the yard! Shouldn't this affect the long-term strategy? Let's turn to statistics again. Over the past 70 years, every year there has been a serious crisis in the world, such that it seemed that the market would not stand up and collapse. In 1954, the Dow Jones index reached a dizzying, as it was then thought, 300 points. But it didn't collapse. In 1986, the index reached 1800 points, collapsed, and came back. And here's the latest story: the Dow Jones has reached 14,000 points, collapsed below 7000 points, but today it is already 9500 again. This once again shows that the market is growing no matter what, and that a well-diversified investor should be calm.

7. Have a fundamental investment vision, understanding of the world around you Investing in cold blood and for a long time is good, but investing indifferently, without a strategy is very bad.

It is necessary to follow the news, try to understand the current state of the world economy, try to predict the main trends. It is best when the investor does it himself, and it is very good to have an investment consultant who knows how to do it professionally.

8. The main enemies of the investor and the main friends of the investorThe main enemies of the investor are very easy to remember: it is Faith, Hope, Love.

And the point here is not at all that women sometimes destroy the best investment plans: it's about emotions that are the result of these three emotional moods, these, if I may say so, temporary bouts of insanity.

Let's start with the last one: Love. Love is a crazy attachment that, in fact, has no rational explanation. For example, among Russians there are often people who, out of patriotic motives, are ready to invest only in Russia. As a result, their portfolio is not diversified at all, and this can lead to the loss of a significant part of their invested funds. And by the way, both the Americans and the French are investing heavily in Russia, and they are doing this not out of love for Russia, but for the sake of diversifying their portfolios. So I advise my clients, without any love for these countries, to invest in India and China: this is very good for your portfolio. Let your patriotism manifest itself in your solvency, and hence the opportunity to actively participate in improving life in Russia. It is good when patriotism is expressed in the fact that a person does not stand in line at a free polyclinic, does not depend on a state pension, but on the contrary, has the opportunity to financially help those who, for various reasons, have not accumulated savings. Real patriots of Russia make portfolios for themselves that provide them with stability, well–being, and confidence in their future - these are the kind of citizens Russia needs.

Also, exclusive attachment to a single investment instrument falls into the category of love. It is dangerous if, upon retirement, all you have is a house in the village, a collection of stamps, or Gazprom shares. Firstly, assets must be liquid, and secondly, their value must be predictable (and sufficient!) for many years to come.

Hope is the main property of Leni Golubkov's unpretentious nature. Of course, he was satisfied only with an investment that brought 10% per month, so that after making 10 rubles, he would become a real millionaire in five years, without doing anything for this. MMM collapsed, but hope dies last: now the path to the million that emerged from nothing lay through real estate. An investor should remember: when he is inspired with hope, they try to throw him. A well-diversified long-term portfolio denominated in several currencies will exceed inflation by 5-7% per year, and this is very good, because over time it will double, triple your money. Everything else is special opportunities, where high profitability corresponds to high risk.

And finally, the most dangerous thing is faith. The investor should not take anything and no one on faith, the investor simply has to be a positive skeptic, and it is positive, those who doubt the illusion offered to him not because he is offended by the whole world, but because he wants to get to the truth. In the modern world, precisely because it seems democratic and open, the ability to mislead has reached unprecedented heights. This is the first time that high-level professionals, who have a whole science at their service, are engaged in this. Therefore, it is very important to be sane and not believe in miracles: as soon as you believed in someone's miracle, you mortgaged your life and lost even more than your fortune. Your principle should be the credo of a self-sufficient, accomplished, independent person: "Don't believe, don't be afraid, don't ask." If you think about it, these golden words are the main principle of the investor.

But there is another important condition, without which money will not come to you. Those who are afraid of the freedom and opportunities that money can give, subconsciously push them away from themselves. You must know for sure that you are worthy of your money, that you need it to achieve the goals set for you – and then, with the help of investments, you will achieve these goals.

Portal "Eternal youth" http://vechnayamolodost.ru09.10.2009