The suggestion at my local BCF was that I buy my son a pair of Crocs.
“No thanks, Crocs are the ugliest shoes ever made, I’m not doing that to my kid.”
The person helping me and I disagreed on how bad Crocs were. We did agree that if she could show me an uglier pair of shoes, I’d wear them… I was under-researched, over-confident. The consequences were amusing, but there for all to see.
It’s far less amusing when it’s your hard-earned cash at stake.
How do we get to a place where we are investing more than we should in things we don’t understand – a big contributor is over-confidence.
You have a bit of money spare. You hear about a hot new company (an AI firm that’s going to change the world, the next Instagram, a mining co sitting on a fortune). Not sure what it does, exactly, but you’ve heard it’s going to shoot the lights out. The person who put you onto it is smart. It goes up, you’re feeling pretty good. You hear of another one, dip your toes in a bit more and this one goes up. Two from two, you’ve got a knack for this. The gains in % terms were pretty impressive, but you didn’t invest much.
The next logical step is to invest more, you’re pretty good at this. There we have it, over-confidence and suddenly you find your exposure is more than you’d like and your risk is far higher. It’s a perfectly reasonably progression at the time, but you only really get to examine it in hindsight when it doesn’t go well.
How to avoid these 2 mistakes?
1. Spread the risk – make sure one investment isn’t make or break. Instead of buying a single share, you can buy a pre-packaged group of shares, or properties tailored to your needs and you can be really specific on what you’re buying. How specific? Well, if you decide you want to buy shares in companies related to water, or healthcare, or battery technology or robotics you can. If you want office buildings, or shopping centres in CBD’s but not regional areas or vice versa you can, easily. You might even buy a group that includes your hot new pick.
2. Research and read up on the investment. I’m biased here, but get advice. You don’t have to reinvent the wheel, read the financials and company reports, there are advisers and research analysts who’ve already done it. Unless you’re an expert in this sort of research, leverage off somebody else’s experience and brain power
There’s nothing wrong with being aggressive in your investing, but it’s crucial to make sure that it’s aggressive investing and not betting.