Investing.com - In the midst of Financial Literacy Week, 5 experts from Capital Group detail 5 investment mistakes to avoid. Here's what the experts have to say:
1. Beware of investing just because you like the project
Greg Wendt, equity manager
A few years ago, I invested in a cruise operator called American Classic Voyages because the idea behind it appealed to me. The company had its roots in the Delta Queen Steamboat Company, which organised cruises on the Mississippi River. Billionaire financier Sam Zell was the company's president and he intended to revolutionise the cruise industry. The idea was for American Classic Voyages to gain exclusive rights to cruise the Hawaiian Islands through the protectionist maritime laws of the United States.
I looked closely at the dynamics of the Hawaiian tourism sector and the cruise industry in general, and concluded that these trips would be in strong demand. The company was able to raise all the necessary capital, hired a dream management team and began building the ship in a Mississippi shipyard.
At the time, it had been more than 25 years since a cruise ship had been built on US soil, but the shipyard had extensive experience in building military vessels. What could go wrong?
It turns out that regaining industrial skills after losing them is not so easy. The multi-million dollar effort it took to build the ship failed, and the company went bankrupt for this and other reasons. I never thought it was not possible to find the talent needed to build a ship in the United States. In the end, the ship was towed to Europe, where it was completed. But the investment thesis sank without remedy.
Lesson learned: Do not assume that a company can execute its business strategy without understanding how it will do so.
2. Avoid analysis paralysis
Lisa Thompson, equity manager
Investing is a discipline that is half art and half science. To get good results, you have to collect the data and crunch the numbers. But you also have to make decisions based on the knowledge you've gained from experience.
By nature, I tend to invest against the market trend, so I tend to avoid the crowd and get interested in an investment when others are selling. The great commodity super-cycle of the early 2000s, which had been driven by the rapid growth of the Chinese economy, had more or less come to an end in 2014. After rising strongly from $10 a tonne in 2003 to around $170 in April 2009, the price of iron ore fell below $70 a tonne in December 2014.
The share price of mining companies also fell in the face of falling prices. In this environment, I started working with our mining sector analyst and became interested in Vale, the Brazilian company specialising in iron ore production. However, investors with experience of investing in cyclical companies like Vale know that it can be very difficult to determine when a cycle has bottomed out, so during this period I met frequently with the analyst to review the numbers. In the meantime, the share price continued to fall.
At Capital Group, we have what I believe is a competitive advantage, and that is that our analysts often cover a particular sector for years, even decades. Thanks to them, we have access to a huge amount of very precise knowledge. But I remember at one point I met the industry analyst and I asked him: "We already know a lot about this company, do we need more information to make a decision?
I remember thinking that I already knew the discounted cash flows, the premiums, the penalties, the international demand context. One more piece of information was not going to help. I have to make the best possible decision with the information I have. And these can be complicated decisions, but that's what a manager's job is all about.
Lesson learned: Analysis is crucial, but sometimes more information is too much. To invest successfully, you have to know when to act on the information you have.
3. Trust, but check
Steve Watson, equity manager
At Capital Group, we believe it is very important to get to know the managers of the companies we invest in, meet with them and communicate with them. Understanding the managers as individuals can help us assess their business strategy and whether they are the right people to execute it. But it can also help us to stop wondering whether they are lying to us. It is true that most of the managers we encounter are honest and well-meaning people, but that does not mean they are always honest with us, or even with themselves.
Sometimes even the most experienced investors can fall victim to deception. Several years after I started working in Capital Group's Hong Kong office, I decided to invest in Sino-Forest, a Chinese company that owned and managed forestry land with the intention of eventually selling it to other investors.
Between 2003 and 2011, Sino's Toronto-listed shares rose more than 500% on the back of the company's reports of strong earnings growth. It came to light that the company had falsified numerous transactions, some 450 in the first quarter of 2009 alone.
In 2011, the company was investigated by the Ontario Securities and Exchange Commission. The stock was suspended from trading and in 2012 Sino filed for bankruptcy. Ultimately, the Ontario Securities and Exchange Commission found that certain officers of the company had "knowingly engaged in dishonest or fraudulent conduct in relation to Sino-Forest's income and forestry assets".
Lesson learned: A healthy dose of scepticism needs to be applied to the financial statements of companies and the managers who run them.
4. Don't get carried away with confirmation bias.
Justin Toner, equity manager Boeing (NYSE:BA) has been through several crises. Not just 9/11, but more recently in 2019, when its 737 Max model crashed due to malfunctioning flight controls, and in 2020, with the covid pandemic. I was quite surprised at how quickly the company reacted to the pandemic and the worldwide travel industry shutdown. In retrospect, I can say that I underestimated the gravity of the situation.
In fact, I don't think anyone could have really foreseen the gravity of the situation. But the fact is that the circumstances worsened very quickly, right after the problems with the 737 Max aircraft. It was a very difficult period for me as an analyst. And I was also managing some funds.
After almost 20 years of experience in the industry, it would be reasonable to think that I should have seen the warning signs and reacted quickly and decisively. But the truth is that this job is very complicated and, like all people, investment managers can fall victim to their own biases and emotions. We can fall prey to confirmation bias, i.e. the tendency to seek information that confirms our previous biases. This experience was a huge learning experience for me.
Lesson learned: Question your own point of view and be prepared to act quickly when circumstances change.
5. Retire in time
Martin Jacobs, equity manager
Investing successfully for the long term is incredibly difficult, even though it may seem incredibly simple: systematically identify great companies whose stocks can generate superior returns over time.
But what I have also learnt in my career is that great companies can also fall, so having and sticking to a strong sales discipline can be just as important. In his book The Art of Execution: How the world's best investors get it wrong and still make millions in the markets Lee Freeman-Shor talks about this competence.
Freeman-Shor, a fund of funds manager, analysed seven years of data based on the actual investment results of 45 of the world's top investors. One of the most interesting observations from that study was the importance of weighting and conviction.
What he discovered was that it is not about how often you get it right or wrong, but how much money you make when you get it right and how much you lose when you get it wrong. As part of my portfolio management work, I have found that these decisions of weighting and conviction are really important.
The book identifies five different "tribes" of professional investors based on their behaviour. One group he called "the killers", because they were hard sellers. What mattered most to them was cutting their losses when the stock fell. Numerous behavioural psychology studies have shown that investors find it ten times harder to take a loss in real life than on paper. In other words: we all have an emotional tendency to avoid cutting our losses and moving on.
Therefore, the discipline to walk away from an investment when it no longer performs well can be very important to successful investing. Long-term investors must be willing to change course when an investment thesis no longer works. I have found this to be one of the most difficult things for a manager to do.
Lesson learned: Knowing when to sell a position and move on can be as important as knowing when to buy it.
Translated from Spanish using DeepL.
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