“You must be careful what you learn from each mistake,” he concludes. “There isn’t a right way of doing it. Every investment approach has its moments. What doesn’t work is moving between approaches too fast.
“You can modify your approach, but don’t abandon it completely. This is because over time growth, value and contrarian investment works. What doesn’t is following what is in favour and abandoning it when it does wrong. Buying yesterday’s stories is not the way to go.
“If you keep that discipline of buying on weakness and selling on strength, you should be fine over the long-term. My strategy for now is to buy slower on weakness and reduce slower on strength. In the past I’ve always been too early, so this time I want to do things more gradually.”
Rule 5: Avoid the crowd
Chartered financial planner Philip Milton reckons growing communication methods across the world are creating potentially better opportunities to find unloved winners.
With many newspaper columns and internet forums dedicated to endorsing the prospects of the next big trend, the likes of Mr Milton take advantage by focusing on companies specialising in dull things that people seldom talk about.
Following the crowd is often recognised as one of the biggest flaws in investment circles. Many feel safe when following recommendations, even though history has repeatedly shown these uninformed decisions seldom achieve the desired result.
From Sir Isaac Newton’s costly mistake of backing the South Sea Bubble in 1720, through to the recent dramatic downfall of the seemingly profitable insurance technology group Quindell to investors have been punished for blindly following the latest hype.
Rule 6: Don’t think you can’t lose
Mr Milton points to the residential property market craze as a classic example of another big behavioural weakness in investors – overconfidence. “The residential property market demonstrates all the worst traits of behavioural bias,” he says.
“People don’t think they can ever lose, that significant annual out-performance of this inanimate object over inflation, earnings and anything else are assured ad infinitum, and there is no risk in borrowing to invest (or to buy one’s home).
“Then they assume that even if things began to be tricky they could simply ride-out the minimal upset till the next doubling in seven years. Or they would sell, oblivious to the fact that ‘everybody else’ would be looking to do the same thing.
“They have no concept that interest rates can rise and exceed the rentals from their buy-to-lets, that tenants can cause them grief and leave them nursing several thousands of pounds of repair and redecoration costs upon vacation, and that structural works need to be undertaken from time to time.”
