All investors, from rookies to professionals, make mistakes from time to time. The characteristic that distinguishes great investors is the willingness and ability to learn from those mistakes. With that in mind, three of our contributors would like to share their biggest investing regrets from the past year, in the hopes that they (and you) will learn from them.
Selena Maranjian: My biggest investing regret of 2015 is one I've regretted over many years: holding too many different stocks. I'm not a rookie investor, but I'm making a rookie mistake by adding more and more holdings over time without thinning them out.
What's so bad about that? Well, lots of things. For starters, it's much harder to keep up with dozens of different companies than it is to keep up with 10 to 20. Thus, I'm underinformed about most of them and I may not realize when it's a good time to sell one -- or add shares.
Having lots of holdings does offer diversification, so that if one holding tanks, my portfolio isn't likely to suffer too much. But that also means that my gains in any particular holding aren't likely to move the needle by a lot, either. Imagine, for example, one portfolio with 10 stocks and one with 50, with assets evenly distributed in each. Each holding in the 10-stock portfolio represents 10% of its overall value, while each of the 50-stock one represents just 2%.
It's best to have your portfolio concentrated on your best ideas -- ideally your 10 to 20 best ones, not your 50 best ones. After all, if you're adding money to your portfolio, wouldn't it be better to add to one of your top ideas, rather than, say, your 48th-best idea? It's not smart to hold too few companies, but holding too many doesn't let your most promising holdings perform as powerfully for you as they could.
Dan Caplinger: My biggest investing regret in 2015 was one that I've struggled with throughout my investing career: being reluctant to buy shares of stocks after they've already gone up in price substantially. I tend to be a value investor, looking for stocks that have gotten beaten up and hoping to buy in at bargain prices. Once the stock bounces back, it's frustrating to have missed out on the best opportunity to invest.
What 2015 taught me is that many stocks that have already seen substantial gains turn out to have more room to run. For instance, Dow component Nike (NYSE:NKE) has performed extremely well in recent years, and coming into 2015, it was reasonable to expect a potential pullback based on rising competition and a strong dollar. Yet in its most recent quarterly report, Nike reported a 4% rise in revenue that produced earnings growth of 20%, despite facing currency-related headwinds. On a currency-neutral basis, double-digit percentage growth in all of Nike's geographical areas showed how well the athletic giant has done even in economically weaker parts of the world. Not buying into Nike early in 2015 cost investors a 34% gain, showing how you can miss out on opportunities by thinking it's too late in the game to take advantage.
Matt Frankel: My biggest investing regret of 2015 is hanging on to some of my losing investments for far too long.
Like Dan, I tend to be a bargain hunter and try to pick up beaten-down stocks with the intention of holding them for years to come. However, sometimes it becomes a good idea to know when you made the wrong choice, cut your losses, and move on.
For example, I first bought shares of Transocean (NYSE:RIG) in 2013, and added to my position in late 2014 on what I thought was just temporary weakness in oil prices. When I bought my shares, the company had an impressive $27.3 billion backlog of business and was paying a generous $3.00/share dividend. Since then, the backlog has shrunk by nearly 40%, and the dividend was cut by 80% in February 2015, and finally suspended in September 2015.
If I had followed my instincts and cut my losses when the company initially chopped its dividend, not only could I have sold for $19 per share (about 50% more than today's price), but I could have put that money to work for me in a more positive way. It is important to be able to admit when you're wrong, and I intend to learn from this mistake.