How to avoid biggest mistakes in investments. Part I
Read carefully ccFOUND investor’s guide.
Our mind is wired in a way in which we have the tendency to constantly search for information, patterns, options. All to enable us to survive safely.
Those same neurons, unfortunately, turn on an investigation mode and can flood us with emotions that mostly get in the way of good results.
Your brain is to blame for your investment mistakes. Billionaire Warren Buffett, who started out in his 50s, lost $10 billion of potential profit in the Wal-Mart stock because, as he said, he “sucked his thumb” instead of buying rising stocks. “Success in investing doesn’t correlate with IQ,” he said at the time, “you have to constantly correct yourself so you don’t make emotional mistakes.”
Here are two traits worth correcting in order to be the best investor you can be.
Timing and temperament
Timing. Sound investing requires a reasonable time horizon. Consider how you can spread your capital over a timeline. Just as you wouldn’t pay for a vacation in December when you have holiday expenses and a winter tire change ahead of you. Try not to invest on … “from-to” dates that are coupled with your personal spending patterns, as you may be unpleasantly surprised by a mid-term rate drop or correction just when you need to use the invested funds for something else. Then you will jump out of the investment on the negative. That is why you should always at least adjust the amount of funds allocated for your investment to other spending plans. Don’t ever invest everything you have.
Temperament. The greatest investors are able to stay calm and balanced as the rest of us are going crazy. This makes them consistently outperform investors who get lucky sometimes. Warren Buffett said the key to success is a tethered temperament. Few are able to replicate his investment success. Many of us succumb to our emotions and clean out our portfolios when we see declines.
No IQ, no psychiatric visits, and no magic spells are going to help when your investment falls below 50%, and you need to take the time to analyze the situation objectively instead of jumping out with a loss because it might be the perfect time to buy instead of sell.
The history of the largest investments and fortunes teaches us that they were made by investing in promising companies for the long term with the prospect of profit for several years, not by jumping in and out of investments out of fear and greed at the worst moments.
So build resilience to the emotions that lead to bad investment decisions.
Here are five exercises for a startup investor to stay cool:
1. Repeat this mantra to yourself: “I’m a serious investor; I’m not a speculator; I expect that over time, price appreciation, dividends, will produce the expected returns.”
2. Focus on the value of the companies you invest in. Don’t focus on daily price movements.
3. Buy and hold. Buy with the intention of holding for the long term.
4. Never act like a speculator. Be resilient.
5. Don’t give in to the atmosphere created by market commentators. Calm down and stop clicking.
When investing in startups, time is not measured in minutes. You choose investments for their long-term potential, so resist the temptation to keep going.
Make decisions in cold blood, even when you have an insider. Sometimes the best action is no action at all.
Review your investment process again. On a piece of paper, write down why you invested in a certain company or cryptocurrency. Keep an investor’s notebook from which you can calmly read over time what drove your investment decisions.
Confront constantly what has fundamentally changed. This simple exercise teaches you that the ups and downs of the stock market have little bearing on long-term wealth acquisition.
Don’t act chaotically. Open a “basket” and keep track of your potential assets to stay on top of investments that pique your interest before you get into them. When preparation meets opportunity, that is when great investments are made.
Minimize risk by diversifying your assets — keep a portfolio of a few different assets that are trending against each other. You invest by averaging your expenses; then cluster your investments over time by regularly investing a certain amount during the ups and downs.
For example, every month for three months, you buy a cryptocurrency for $1,000, regardless of its price. When the rate drops, you buy more, and when it gets more expensive, you buy less. This is the average cost strategy.
The idea behind this strategy is that when prices are high, you can only afford to buy a certain number of cryptocurrencies, or stocks. When prices are falling, you can buy more for a fixed amount invested each period. When the stock market situation improves, you can enjoy owning more shares bought at a low price.
A similar way to average the risk of an investment is to divide the potential investment amount by three and choose three different times on the timeline to buy the asset.
Each temperament is its own path to success or failure. If you establish clear parameters for your investment allocation model that best allow you to sleep at night then you have drawn the correct conclusions from this article.
Last but not least
Don’t fight your temperament and instead, learn to use your strengths. Find investments that suit you.
You know best what temperament you have. Sometimes when your investment choices surprise you, remember that volatility always creates opportunity.
It is important that you understand your decisions and feel that they have been thought through.
What should you be wary of the crypto market?
First and foremost, naivety and greed. We have thousands of cryptocurrency projects and new ones are being created every day. Among them, we have those that were created from the beginning in order to gain as much money as possible, and after reaching their goal, they disappear just as quickly as they were created.
We also have those that will be abandoned by the creators or lose the interest of the community, and investors will be left with worthless tokens.
Some cryptocurrencies will be stolen by hackers due to security flaws, the same goes for smaller exchanges (it happens that the big ones return stolen crypto to their customers with their own funds).
We are not only able to make good decisions, but prudence and caution will reduce the risk. If a project promises you the moon and stars e.g. very high profits in a short time — be careful, research it and don’t invest too much.
If suddenly the community starts to be bombarded with information about a new, revolutionary coin that will conquer the market — act as above, because every team of developers promises a lot, and few of them are actually able to deliver.
If celebrities are promoting a cryptocurrency you can be almost sure that they themselves own it in large quantities and want to boost the exchange rate or they have been paid to promote it. This also applies to youtubers and other influencers.
If you get a message that forgotten bitcoins are waiting for you to collect them or someone wants to multiply your funds but first needs you to send them to the address provided — don’t click any links and delete such messages. No one will make you two from one bitcoin, not even Vitalik.
Finally, one very important thing: guard your passwords and private keys (e.g. print several copies and hide them well, as lost passwords are unlikely to be recovered), never share them with unknown people under any circumstances, and preferably do not access wallets or exchanges from insecure devices or download applications from unverified sources.
You can never be certain that your smartphone or computer has not been hacked in this way. If cryptocurrencies are sent to another address, the chances of recovering them are nearly impossible. In such a decentralized market, there is usually no one to complain to.
Tamara and Alexandra