We all have bad habits. Maybe we leave the toilet seat up, forget to brush our teeth, or eat too many snacks. Some of these bad habits are harmless, but some of them, like smoking cigarettes and failing to buckle up, might just kill you in the long run. Bad investing habits can have a similar effect. After all, a 2% difference in investment returns over 20 years can result in a stunning 40% difference in total return. That said, here are some of the investing bad habits I'm trying to kick:
Confusing "if" and "or"
Sometimes my investment thesis contains a lot of ifs: IF broadband penetration rates go up and IF everyone decides to start buying health and beauty products online and IF operating margins increase and IF Amazon
Instead, I'd rather find investments where it's easier to win. For example, instead of looking for stocks where I need multiple things to go right to win, it's better to look for stocks where multiple things have to go wrong to lose.
Half a year ago, IAC/InterActiveCorp
The Master of the Universe complex
For some reason, those of us in finance love complexity. I'm currently studying for level 3 of the CFA and it's not pretty. Instead of saying "constant variance", they say "homoskedasticity" -- what a mouthful. I once sat through a presentation on how to harvest gamma (the second derivative of the sensitivity of an option's price to the underlying security's price) from a short equity, long convertible bond position. Needless to say, I didn't understand anything and felt like the world's dumbest human being.
I find that many investors (myself included) often favor complex investment ideas in industries we really don't know anything about over simple ideas in industries that we are familiar with. I believe we make these mistakes because of the "master of the universe" appeal of investing in an ultra-complex investment that mere mortals cannot comprehend. It's also much harder for others to refute a complex investment thesis, mostly because no one really understands it. So instead of spending months trying to understand a complex investment idea, I think I'd rather look for the simple, understandable ones that make sense.
Anchoring on price
I recently spent quite a bit of time studying wallboard manufacturer USG
However, I didn't benefit when USG's stock went up. Why? I was anchored on the stock's historical price. In 2003 and 2004, the stock had traded between $4 and $40 per share -- I figured if I was a little patient I could get the stock a couple bucks cheaper. Instead the stock went up 20% and now I really don't want to buy it, even though I spent all that time studying the company and felt very strongly that it was undervalued. In other words, it doesn't matter what price USG was trading at two years ago -- that has no bearing on whether or not it's undervalued today. After all, just because someone else was selling $100 bills for $10 a year ago doesn't mean it's a bad buy at $50 today (and conversely, just because someone was buying $100 bills for $200 doesn't mean it's a great buy at $150 today).
Improving the investment process
The process of continual improvement is exhausting and extremely difficult to sustain over a long period of time. But by continually improving our investment processes and weeding out bad investing habits, I believe it may be possible to add a couple of points to your long-term rate of return, which makes a huge difference over time.
Amazon is a Motley Fool Stock Advisor selection. To see why, take a free 30-day trial today.
USG is an Inside Value pick.
Fool contributor Emil Lee is an analyst and a disciple of value investing, not to mention the owner of a couple not-so-pretty bad habits. He owns shares in Lear and IAC/InterActiveCorp. Make it a habit to read The Motley Fool's disclosure policy. Emil appreciates comments, concerns, and complaints.