My Biggest Investing Mistakes Of The Last Year

16th Jan by Mark Simpson

41 comments 2734 reads

The problems with portfolio reviews

In early January, many investors like to publish end-of-year reviews. However, a form of selection bias undoubtedly affects who chooses to report. Those who have done well are more likely to put the effort in to write up their investing year. Professional investors have to report their performance, and their partners expect detailed commentary, which can give a more balanced view. However, even amongst these investors, having a strong year can introduce an element of hubris. Merriam-Webster summarises hubris as:

In classical Greek tragedy, hubris was often a fatal shortcoming that brought about the fall of the tragic hero. Typically, overconfidence led the hero to attempt to overstep the boundaries of human limitations and assume a godlike status, and the gods inevitably humbled the offender with a sharp reminder of his or her mortality.

Anyone who has invested for any period of time will recognise the feeling of being humbled by the market gods!

A second bias affects those reading portfolio reviews. Investors view someone with a particularly strong yearly performance as someone to be emulated. This may be true over the very long term. However, the time period that investors evaluate performance is typically three to five years. In the same way that corporate performance tends to mean-revert over these timescales, so do many investment styles. For example, Quality Investors performed phenomenally well from 2015 to 2019, and this gave many fund managers in this space godlike status. Sadly, neither the performance of the funds nor the status of these managers survived different market conditions. Investors who read the glowing annual reviews and converted to investing in “quality compounders” and holding forever are still waiting for their time in the sun.

With selection bias, hubris, and switching strategies being major problems that can be caused by portfolio reviews, it is tempting to neither review one’s portfolio nor read others’ reviews. However, this may cause investors to miss out on significant learning opportunities. The best investors tend not to be those with the greatest knowledge but those who are most willing to keep adding to their understanding. My own solution is to review the mistakes I made over the past year, with, hopefully, a focus on avoiding these in the future.

What is a mistake?

It may be tempting to think that every losing investment was a mistake. However, I don’t think this is…

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Spender71

16th Jan

Stingingly honest post. Few would advertise their errors only boast of successes. But the post is so important as it shows the importance of rehearsing the reasons for actions and teaches lessons which are universal. Thanks Mark.

David Wordsworth

17th Jan

Secure Trust Bank (LON:STB)

Close Brothers (LON:CBG)

It was said up until October the band news of DCAs was priced into these assets. It wasn’t.

I’m now 45% underwater on the former (although did top slice more than I’ve lost in total).

I think I’ll be waiting a long time to get back to neutral, if they don’t become insolvent.

You don’t want to ‘lose money’ as Buffett said, but there’s an opportunity cost to holding in these circumstances

timarr

Buffett wasn't suggesting you should hold onto a losing investment simply in the hope of it "coming good". That's loss aversion - the inability to take a loss and move on, it's one of the major reasons private investors underperform the market. What Buffett was talking about was value investing, which is a very different thing:

Of course, as Mark suggests, there are times where we can make the right decisions and get the wrong result. However, the question is "over what timeframe?"

I habitually invest too soon - based on fundamentals but into a falling trend - and then have to wait for the market to appreciate the genius of my decision (ahem) - or rather, for the fundamentals to overwhelm momentum. Generally, if the decision hasn't played out in three years I will move on. I never, ever, simply hold onto a stock because I'm hoping I'll make my money back.

However, circumstances change, as we saw with Secure Trust Bank (LON:STB) and Close Brothers (LON:CBG). Bitter experience shows that as soon as regulators get involved the impact is unquantifiable and the timescale over which it will play out is unforeseeable. Company managements are habitually optimistic, but frankly can't have a clue in these circumstances because no one does.

I sold both on the original announcement and wouldn't go near anything connected to this mess until there's a clear resolution - which could take years and be incredibly expensive.

As the old phrase goes - you don't have to make it back the way you lost it.

Silver Moon

But Mark, you haven't mentioned Doubling-Down, this was my downfall in Hummingbird. Decisions like this and Top-Slicing must be made but can go either way and not only that but can go hand in hand. I would eleborate on Michael Maubousin's table by inserting Poor and Fair between Bad and Good since nothing is black or white when investing in shares. Take my holding in CMC Markets, first doubling down - good, then top-slicing - good. Then buying Wise - good - then top-slicing - poor, buying Serabi Gold - good - and holding on - good - and buying Pan African and holding on -good - and top-slicng it - good. Adding To is yet another decision, not quite the same as doubling-down, which can lead to mistakes in the Poor/Fair area. Typically this is where re-investment of my divividends go. At this moment in time I see myself standing at a crossroads and not seeing any lettering on the signpost so wish readers of this comment 'Dumb Luck'.

johnsmith68

Thanks Mark for such an open and candid post. One of my golden rules to assist me in not breaching Buffet's first and second rule is my "never ignore the Falling Star rule": if anything I hold becomes a Falling Star, I sell immediately and I never buy into a Falling Star no matter how tempting the recovery play looks.

Of course it's not foolproof , as indeed none of the Stock rankings are (one only has to look at the unfortunate Super Stock that was IG Design (LON:IGR) prior to this morning's bombshell trading update).

A good example of how my rule has saved me from the opportunity cost of holding onto something for too long would be Bioventix (LON:BVXP) , a company I've done well from and hugely admire. It's also one I've "fallen in love with" in the past but having peaked around £50 last February, it became a Falling Star a few months later at around £43. Because of my love for the share, it would have been tempting to sit tight but that would have been a mistake. My capital was better deployed into something with momentum and the opportunity cost would have been great as the share steadily continued its decline towards today's £31. It remains a Falling Star and I remain out of it despite my continuing admiration of the company.

I guess my point is that we all pay our subscriptions and sometimes forget that the most powerful tools we have are right in front of us. The apparent simplicity of the rankings and styles belie their power.

Douglas1971

Brilliant article Mark and really interesting posts. I tend to find selling losing positions which I have had a long time despite profit warnings YouGov (LON:YOU) Solid State (LON:SOLI) is my mistake. Both these companies I have done extremely well but I fool myself into thinking after a profit warning “it will come back and I will make up the loss” and it NEVER happens. I watch them tank 40% and also don’t even put a short bet on even though the opportunity is staring me in the face!

SCI20

Great article Mark. I read this yesterday with a sense of achievement that I had avoided any major mistakes last year. Today however I have taken a real kicking. A 55% loss on IG Design (LON:IGR) after todays profit warning. Following Ed’s rule I sold today on this profit warning. I read the RNS at 7am and placed a stop loss trade at 15% below last nights closing price. The price gapped down over 30% on opening and by the time I was able to get AJB to place a trade the price had fallen to 55%. All Stocko metrics are good and the chart did not seem to me to indicate any real momentum shift. My question is could I have avoided this mistake.

IG Design (LON:IGR)

My question is could I have avoided this mistake.

There was a previous profit warning last September. That was the time to get out.

Stockranks and other metrics aren't reliable indicators at the level of individual stocks, only at the portfolio level.

Thanks Timarr.

Lolarose

Thank you Mark loved very well written article that makes one re think certain strategies. The common mistake is falling in love with a share.

My example is Ashtead first bought in 2010 at around £6.20. those that know the share knows that it has touched highs of £64. I held for over 20 years sold some during Covid when it fell to £17. Bought in again at £24 kept it ever since it went back up to £64. A small profit warning sent it back to £49. only a few weeks ago.

I keep breaking my own promise to myself to top slice when it gets to the £60s. Now waiting for the long climb up again. will it happen who knows.

Would be great to hear if others have the hold for ever thoughts.

Dear all, I have never read a book about Warren Buffet. I would imagine there has been an astonishing amount written about Mr Buffet however can anyone recommend a good book?

The Snowball, his biography by Alice Shroeder which he supported (and probably wished he hadn't). It'll tell you more about why Buffett invests the way he does than any amount of "Invest Like Warren Buffett" books which don't tell you how to invest like Warren Buffett on account of they're not written by Warren Buffett.

Or the Berkshire Hathaway annual shareholder letters, which probably give as good an explanation of why he does what he does as you'll ever get:

https://www.berkshirehathaway....

Thanks timarr.

Fire Juggler

Candid. Or Candide. In this Voltaire - 'best of all possible worlds' we often showcase our gains but not our losses. The endowment effect is so strong it's hard to admit errors / that + compounded effects with Kahnemans prospect theory (we feel losses x2 as much as we enjoy gains) means that your candid take is even rarer. Thank you. Honesty and self awareness are rare these days. ps I enjoy my losses as it allows me to reallocate capital to missed opportunity costs... and keeps my feet on the ground. I'm a bore already. Imagine if everything share I invested in made 100% gains...(we can only dream)

Buffet is ok in a folksy way. But it was a partnership and personally I think Charlie Munger was the wiser. His Almanack is now available again https://www.amazon.co.uk/Poor-...

Also ( I forgot) I like the Greek stuff. Not millenium but 2000 years old trading advice. Hamartia, hubris, nemesis, peripeteia, anagnorisis and... catharsis. The Germans added Shadenfreude ( A word that doesn't exist in English so we don't need to go there) . And of course there is occasional flourishing ; Eudaemonia. Life is often a tragedy, sometimes a comedy - but always a quest. Good luck to all fellow travellers!

Mark Simpson

18th Jan

Thanks SCI20, and commiserations on IG Design (LON:IGR) , which I also held, and was one of my 12 Stocks of Christmas.

I guess we have yet to see whether this ends up being one of my Investing Mistakes for 2025, but the initial signs are that it could well be. My mistake appears to be believing the well-regarded CEO and CFO when they gave very specific reasons why they thought H2 would be ok this year on a recent PI World presentation. Given the exact opposite of what they said appears to have happened, they have pretty much gone from hero to zero in one step.

Could you or I have avoided this mistake? Perhaps by never listening to management teams and going by the pure numbers, which did suggest H2 could be a stretch to hit the figures for £IGR . But then, I know many investors get their edge from management calls, attending AGMs, etc., and prior to this week's update, the team at IG Design (LON:IGR) were highly credible.

One thing I think could be a mistake is expecting that a stop-loss order would save the losses. In my experience, such market orders almost always get executed at the worst prices of the day. They guarantee losses rather than stop them.

I think the idea of automatically selling on a profits warning is also potentially problematic. While the quant approach doesn't avoid getting profits warnings, it can guide you as to how to react after you've had the initial blow. While the average stock continues to decline, there is quite a big variation between styles. High Flyers, those with high momentum and low value, tend to do really badly following profit warnings. Whereas Quality Value stocks actually tend to bounce back somewhat. This is what the Ranks were for IG Design (LON:IGR) prior to the warning:

So there may be some nuance or specific reasons this won't follow the typical trend, but with the QV ranks higher than the M, this may be a candidate to hold rather than react and sell.

My own view is that we've gone from a stock on a P/TBV of around 0.5 to maybe around 0.3-0.4 after the write-downs are included. The market is pricing this as if these assets, which are largely receivables and stock, will never be productive again. I think it is perhaps still too early to conclude that. However, it may be a long wait for any re-rating even if management are successful in making these productive again. Given what has happened, the market will not believe the forecasts and will wait for several years of decent numbers before allowing this to trade at a premium to book value again. This will almost certainly be too late to save my pick as one of the 12 Stocks of Christmas, even if it arrives eventually!

Thanks Mark for your detailed reply. I made the decision to sell and crystallise a 55% loss. Time will tell whether or not this was the correct decision. The thought that profit warnings come in threes coupled with the opportunity cost of awaiting a recovery influenced my decision. The biggest frustration was not being able to place a sell trade at market open when the sp had fallen by 30%. The Small Company Share Watch have IG Design (LON:IGR) on their 2025 NAPS so it would appear that a number of investors will have been blindsided by this.

prophetwarning

20th Jan

Thank you Mark for your interesting and honest review of the last year.

AMIDULLAH KHAROTI

thanks mark for the review. my mistake was being overweight on uk stocks and enough on us.

My biggest investing mistakes of the last year

The problems with portfolio reviews

What is a mistake?

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Mark Simpson

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