Financial Piece of Mind (Part Deux)

9 foolish Stock-Picking Mistakes (And How You Can Avoid Them) continued...

Foolish Mistake #5: Mistaking the cheese for the enchilada

If you bought Allied Domecq* (see Part 1 of this post) because they owned Baskin Robbins...

Or Cisco because of Webex (instead of their switches and routers).

Or Schering-Plough because of Coppertone and Dr. Scholls (instead of Claritin).

You are confusing the cheese for the enchilada.

It’s tempting to buy a company for some business that you like.

(Back in the day, you might have picked up Sara Lee for its Coach handbags, for instance).

But unless the business is material to the company’s bottom line, the decision makes no sense.

It's the enchilada you should be interested in, not the cheese. Remember that.

Foolish Mistake #6:  Being an idiot about dividends

During the housing bubble, banks such as Indy Mac Bank were a shareholder’s delight, paying out increasingly hefty dividends.

No one stopped to question the underlying fundamentals.

Indy Mac’s shareholders (hope you were not one of them) paid the ultimate price for that mistake.

Because when Indy Mac collapsed and became an FDIC statistic, you would have lost every last cent of your investment.

Stories such as the Indy Mac story offer a clear lesson.

Dividends can sometimes be red flags rather than signs of a healthy company.

An average dividend paid by a company with an unbroken track-record of dividends is preferable to a dividend from a new kid on the block, or a dividend from a company capitalizing on a short term and cyclical trend.

Foolish Mistake #7: Believing in the Next Big Thing

Netscape investors found it in 1995, Palm investors found it in 2000, Research in Motion investors found it in the early years of the last decade.

The Next Big Thing.

In reality, there’s no way of knowing if something is the Next Big Thing.

Or how long it will remain the Next Big Thing.

So while there’s no harm in grabbing a few shares to catch the wave of the current market darling or darlings (Apple, Netflix, Salesforce or VMWare, anyone)...

Be prudent and do not bet the farm on it.

Foolish Mistake #8:  Letting Your Portfolio Go to the Dogs

Blame it on biology.

The negative effect of losses has a higher impact on our emotions than the positive effect of gains.

(That is we feel more upset at losing a few dollars than we feel happy at winning the lottery).

Which is why it’s so difficult for us to sell a losing stock.

You can read Jason Zweig’s book, ‘Your Money And Your Brain’ for the illuminating science behind it.

But then, after that, you need to toughen up and let go.

Of all those dogs!

(You know the ones I am talking about - the losers you are hoping will rebound to the price you paid for them).

If you persist in letting biology get the better of you, your portfolio could eventually contain a bunch of dogs.

You might as well go into the kennel business.

Foolish Mistake #9: Becoming a slave to “What If?”

Investors often become hopeless prognosticators.

Dogged by all permutations of “what if?”

As in “what if I sell this loser and the stock takes off?”

Or “what if I take profits and then this stock doubles?”

Or “what if I don’t take some profits and capital gains taxes go up next year?”

Or “what if the market plunges and I am left holding a bag of worthless stocks”

Indeed, any of these scenarios can come to pass.

But does this mean you should continuously try to guess at what will happen and take some sort of action?

Maybe.

If you have a Crystal Ball that’s accurate.

Then it might be worth all the extra costs and taxes.

Otherwise, you are setting yourself up for a vicious cycle of shoulda, coulda, woulda, as in:

“I shoulda bought this stock earlier.”

“I coulda held on to that puppy a little longer.”

“I woulda been better off selling this x@%!Y at that time.”

This is however, better than the BIG COLOSSAL MISTAKE.  That happens when you successfully time the market several times in a row, become overconfident, place a large bet and get caught with your pants down.

Both these scenarios - the small regretful losses and lost opportunities - and the unconscionable loss are related to uncontrolled “What ifness”.

So that's what you really need to get under control if you want to have a long innings in the investing game.

Read my post Yoga for Investors for further help with banishing "What ifness" and more investing advice.

P.S. Thanks for reading. Wine and Spirits were the mainstays of Allied Domecq’s business at the time I bought their shares. Some of their well-known brands were Beefeater, Ballantine's, Teachers, Courvoisier, Canadian Club, Kahlúa Coffee, Malibu, Maker's Mark and Sauza. And they were No. 2 to only one other company - Diageo.

P.S. 2: Hope you enjoyed these 2 posts on stock-picking mistakes you should avoid.  Sooner or later you will discover that when it comes to investing, your biggest enemy is not Big Business, Big Brother, Beelzebub or Goldman Sachs. Your biggest enemy is yourself. 

P.S. 3:  I highly recommend meditation as a way to get a hold of yourself. It will not only make you a happier, healthier and more loving person, but it will also train you to become comfortable with just “being” and to deal with "what ifness" in all the areas of your life.