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The 6 Biggest Mistakes Ordinary Investors Make

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The 6 Biggest Mistakes Ordinary Investors Make

In many areas of life, we are often our own worst enemies. The realm of personal finance is no different.

What’s the biggest threat to achieving financial independence?

Unfortunately, it’s your own brain.

You can invest in all the right things, minimize fees and taxes, and even diversify your holdings. But if you fail to master your own psychology, it’s still possible to fall victim to financial self-sabotage.

The Brain’s Design

Today’s infographic is from Tony Robbins, and it uses data and talking points from his #1 Best Selling book Unshakeable: Your Financial Freedom Playbook, which is now available on paperback.

The graphic is based on a chapter in the book that reveals the key psychological limitations of the human brain. It turns out that these fallible survival instincts have been hardwired into our brains over millions of years, and they become very troublesome when we try to make rational financial decisions.

To overcome these instincts, investors need to adopt simple systems, rules, and procedures that can ensure the decisions around money we make are in our best long-term interest.

What I’ve found again and again is that 80% of success is psychology and 20% is mechanics.

– Tony Robbins

Six Psychological Pitfalls to Avoid

Remember these six pitfalls – and how to counteract them – and you’ll be able to avoid the biggest mistakes often made by investors.

Mistake #1:

Seeking confirmation of your own beliefs

Your brain is wired to seek and believe information that validates your existing beliefs. Our minds love “proof” of how smart and right we are.

Even worse, this is magnified by the online echo chambers of the modern world.

  • News media (MSNBC, Fox News, etc.) tend to favor one point of view
  • Google and Facebook filter our search results
  • Unsubstantiated rumors can run unchecked, as long as they reinforce existing points of view

This can be exceptionally detrimental in investing.

Convincing yourself that a particular stock or strategy is correct, without taking into account contradicting evidence, can be the nail in the coffin of financial freedom.

The Solution: Welcome opinions that contradict your own

The best investors know they are vulnerable to confirmation bias, and actively ask questions and seek qualified opinions that disagree with their own.

Ray Dalio, for example, seeks the smartest detractor of his idea, and then tries to find out their full reasoning behind their contrary opinion.

The power of thoughtful disagreement is a great thing.

– Ray Dalio

Mistake #2:

Conflating recent events with ongoing trends

One of the most common – and dangerous – investing mistakes is to believe that the current trend of the day will continue.

In psychology speak, this is known as recency bias, or putting more weight on recent events when evaluating the odds of something happening in the future

For example, an investor might think that because a stock has performed well recently, that it will also do well in the future. Therefore, she buys more – effectively buying at a high point in the stock.

The Solution: Re-balance

Our memories are short, so what can we do?

The best way to avoid this impulsive and faulty decision making is to commit to portfolio allocations (i.e. 60% stocks, 40% bonds) in advance, and then re-balancing on a regular basis.

This effectively ensures you are buying low, and selling high. When stocks to well, you sell some of them to buy other assets in the underweighted part of your portfolio, and vice versa.

Mistake #3:

Overconfidence

Very successful and driven people often assume they will be just as good at investing as they are at other aspects of their life. However, this overconfidence is a common cognitive bias: we constantly overestimate our abilities, our knowledge, and our future prospects.

The Solution: Get Real, and Get Honest

By admitting you have no special advantage, you give yourself an enormous advantage – and you’ll beat the overconfident investors that delude themselves in believing they can outperform.

If you can’t predict the future, the most important thing is to admit it. If it’s true that you can’t make forecasts and yet you try anyway, then that’s really suicide.

– Howard Marks

Mistake #4:

Swinging for the Fences

It’s tempting to go for the big wins in your quest to build financial wealth. But swinging for the fences also means more strikeouts – many which can be difficult to recover from.

The Solution: Think Long Term

The best way to win the game of investing is to achieve sustainable long-term returns that compound over time. Don’t get distracted by the short-term noise on Wall Street, and re-orient your approach to build wealth over the long term.

The stock market is a device for transferring money from the impatient to the patient.

– Warren Buffett

Mistake #5:

Staying Home

This psychological bias is known as “home bias”, and it is the tendency for people to invest disproportionately in markets that are familiar to them. For example, investing in:

  • Your employer’s stock
  • Your own industry
  • Your own country’s stock market
  • Only one asset class

Home bias can leave you overweighted in “what you know”, which can wreak havoc on your portfolio in some circumstances.

The Solution: Diversify

Diversify broadly, in different asset classes and in different countries. From 2000 to 2009, the S&P 500 only returned 1.4% per year, but foreign markets picked up the slack:

  • International stocks: 3.9% per year
  • Emerging markets: 16.2% per year

A well-diversified portfolio would have done well, no matter what.

Mistake #6:

Negativity Bias

Our brains are wired to bombard us with memories of negative experiences.

In fact, one part of our brain – the amygdala – is a biological alarm system that floods the body with fear signals when we are losing money.

The problem with this? When markets plunge, fear takes over and it’s easy to act irrationally. Some people panic, selling their entire portfolios to go into cash.

The Solution: Prepare

The best way to avoid negativity bias is to:

  • Keep record of why you invested in certain securities in the first place
  • Maintain the right asset allocation that will help you through volatility
  • Partner with the right financial advisor to offer advice
  • Focus on the long term, and avoid short-term market distractions

By failing to prepare, you are preparing to fail.

– Benjamin Franklin

Conclusion

These simple rules and procedures will make it easier for you to invest for the long term.

They’ll help you:

  • Trade less
  • Lower investment fees and transaction costs
  • Be more open to views that differ from your own
  • Reduce risk by diversifying globally
  • Control the fears that could otherwise derail you

Will you be perfect? No.

But will you do better? You bet!

And the difference this makes over a lifetime can be substantial.

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Mining

How to Avoid Common Mistakes With Mining Stocks (Part 2: Business Plan)

Investing in mining stocks may seem like luck of the draw, but the sector can be de-risked by asking the right questions. Here we look at the business plan.

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The Business Plan

Everyone loves to talk about creating the next great mining business, but are they willing to put that talk into action?

There is real money and real management behind every company—but surprisingly, not every company has a concrete strategy to build a business and create value for shareholders.

Business Plan, or Lack Thereof?

Today’s infographic comes to us from Eclipse Gold Mining and it shows you how to avoid common mistakes when evaluating and investing in mining exploration stocks.

Specifically, we look at five ways that potential investors can detect the presence and viability of a mining company’s business plan.

The Mining Business Plan

Visit Part 1 of “Common Mistakes With Mining Stocks” on Team by clicking here

So, what should investors be looking for, when it comes to examining the business plan of a mining exploration company?

#1: Clear Vision vs. All Hope & Dreams

A company should articulate a clear vision rather just simply following the trends and hoping for the best. A long term vision for a business plan is critical as it will be guiding and reminding stakeholders of the company’s purpose through the thick and thin.

Signs of a Clear Vision:

  • The company is actively reaching out to investors
  • Projects can be profitable at today’s commodity prices
  • Provide detailed timelines of work
  • Funds committed to work

A clear vision in business will give the company a direction to aim for, allowing everyone to work quickly towards objectives.

#2: Sense of Urgency vs. Wait & See

Time is money, especially in mining. Companies need to build value fast to finance at higher share prices so that early shareholders do not get diluted. A company needs to make concrete decisions that drive towards value creation.

Signs of a Sense of Urgency:

  • “Time is now” mentality
  • Decisive actions
  • Sense of purpose
  • Solution-oriented thinking

It is expensive to maintain a company, especially one that does not yet produce income. Expenses add up quickly and that is why management needs to make sure they focus their efforts and money on activities that generate value for shareholders.

#3: Laser Focus vs. Spray & Pray

The mineral exploration business is tough and each project requires the undivided attention of managers. Smart companies maintain incredible focus to de-risk their projects while others spread themselves thin with multiple projects.

    Signs of a Laser Focus:

  • Properties with a focused vision towards production
  • Specialized management experience aligned with the project
  • Aligning management skill sets with each phase of a project

In order to assess whether a company has the right focus you have to see whether the company is aligning its human assets with its physical assets and a goal in mind.

This focus will help to clarify the story for investors.

#4: Tell the Story vs. Hiding Behind the Science

Communication and business acumen are the key to take a project to market. Mining requires massive amounts of geological knowledge, but that is not the investor’s job to handle. They do not want to want to know the subtleties of geochemistry—they just want to know whether they can make money from those rocks.

Companies that hide behind a wall of geological slides may not have not a real story to tell, and they may be pulling investors into funding their own science projects. At the same time, investors need to make sure that the data being presented matches the story being told.

Signs of Telling the Story:

  • Aware of risks, and communicating those risks
  • Clear understanding of local geology
  • Data from drill results back up the story
  • Consistent message

If a company cannot communicate effectively, how are they going to deal with other, more complicated aspects of a mining business plan?

#5: Endgame in Mind vs. Kicking the Can Down the Road

A journey begins with a single step, but without a business plan and commitment, there will never be an end in sight. Quality companies foresee how their project will come together to generate both liquidity and an exit plan for shareholders. There are several clues investors can use to tell if a company is moving towards its goals.

Signs of the Endgame in Mind:

  • List of accomplished goals
  • Clear vision of future goals and exit strategy
  • Plan for liquidity events for shareholder

The goal in investing is to make money. If shareholders are not making money, what is the point? If a company has no plan, it has no hope.

Making the Right Decisions

Understanding the characters that create value for mining companies is the first step, and the second step is assessing whether there is a viable business plan at hand.

While the risks are high, an effective plan is the first step towards reducing risks and providing shareholders with value.

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Mining

Golden Bulls: Visualizing the Price of Gold from 1915-2020

We break down gold’s three major bull markets over the last century. This includes the current one, in which gold has hit 8-year highs.

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Golden Bulls

Golden Bulls: Visualizing the Price of Gold from 1915-2020

Some people view gold as a relic, a thing of kings, pirates, and myth. It does not produce income, sits in vaults, and adorns the necks and wrists of the wealthy.

But this too is just myth.

In fact, as a financial asset, gold’s value has shone over time with periods of exceptional performance, one of which may be occurring now.

Today’s infographic comes to us from Sprott Physical Gold Trust and outlines the history of the price of gold from 1915 to 2020 and three bull markets or “Golden bulls” since 1969, using monthly data from the London Bullion Market Association.

But first a little history…

The Gold Standard

*All figures are in USD

During the early days of the American Republic, the U.S. used the British gold standard to set the price of its currency. In 1791, it established the price of gold at $19.75 per ounce but also allowed redemption in silver. In 1834, it raised the price of gold to $20.67 per ounce. The price of gold would retain a nominal value through depressions, civil wars, and wars.

However, $20 today is not the same as $20 in the past. The U.S. dollar may have been convertible at a set price, but the amount of goods that it could buy varies year to year based on inflation. So for example from 1934 to 1938, one ounce of gold would cost $34, but $34 today would purchase a small fraction of an ounce of gold.

While the price of gold may appear cheap in the past, adjusted for inflation it is not as low as you would think. Governments would set the price of its currency against an asset to ensure the stability of prices, however if there would be too many claims against the underlying asset, that asset would run out and the currency would become worthless.

This threat would force the hands of governments to change the standards, as currency became more common and gold reserves more scarce.

An Era of Government Intervention

In the wake of the 1929 stock market crash, investors started redeeming U.S. dollars for its equivalent value in gold, removing currency from the economy. In order to stem the flow of funds into gold and the depletion of government gold reserves, in 1933, President Franklin D. Roosevelt limited the private ownership of gold to discourage hoarding and encourage investing. In 1934, Congress passed the Gold Reserve Act which prohibited the private ownership of gold and nominally raised the price of gold to $35 per ounce.

In 1944, the victorious Allied powers negotiated the Bretton Woods Agreement, making the U.S. dollar the official global reserve currency. The United States ensured an ounce of gold would be worth $35 in its currency⁠—at least until the onset of a stagnant economy in the early Seventies led to the official end of any real gold standard.

Golden Bull #1: December 1969 – January 1980

In 1969, the U.S. gold standard had risen to $42 per ounce in nominal terms, however a period of economic volatility would challenge and change U.S. monetary policy.

On August 15, 1971, President Richard Nixon mandated the Federal Reserve to stop honoring the U.S. dollar’s value in gold at a fixed value, abandoning the gold standard. In 1974, President Gerald Ford would once again allow the private ownership of gold bullion. Energy crises, soaring inflation, and high unemployment stagnated the economy.

By January 1980, the price of gold reached $2,234 per ounce in today’s dollars amidst an environment of double-digit inflation. Federal Reserve chairman Paul Volcker fought this inflation with double-digit interest rates which in turn slowed the economy, causing a recession.

The interest-rate-induced recession would herald in a new global economic boom that defined the Eighties and Nineties. The price of gold dropped to $753.96 per ounce by June 1985, as the economy improved.

From December 1969 to January 1980, gold rose from $285 to $2,234 per ounce, an increase of 684% over 122 months, in inflation-adjusted terms.

Golden Bull #2: August 1999 – August 2011

Expanding household incomes and ever declining interest rates under Federal Reserve chairman Greenspan pushed gold further down to a low of $377.44 per ounce by the end of April 2001.

Loose monetary policy and a reduced tax on capital gains spurred speculative investments into the new internet economy through a growing retail brokerage market and the emergence of venture capital. The tech bubble would eventually pop as these companies were unable to build sustainable businesses and investor money dried up.

Over the year of 2000, investors rushed to exit their speculative tech investments resulting in several market crashes. Then in September 2001, 9/11 happened, marking the beginning of a new era. Gold steadily rose during this period.

In 2008, the Global Financial Crisis shook financial markets and left a recession. Policy makers and central bankers embarked on a controversial policy of quantitative easing to support financial markets. The price of one ounce of gold reached new highs by the end of August 2011, as worries on debt levels mounted for the U.S. and other countries.

From August 1999 to August 2011, gold rose from $394 to $2,066 per ounce, an increase of 425% over 145 months, in inflation-adjusted terms.

Golden Bull #3?: November 2015 – May 2020

In the aftermath of the GFC, the Federal Reserve stoked an economic recovery with cheap money, seeing gold track to a low of $1,050 per ounce by December 2015. It was not until the election of a peculiar American president in 2016 that gold would rise again.

Pressure to increase interest rates, an aging debt-fueled economic recovery, a trade war with China, and the recent COVID-19 crisis has once again provoked economic uncertainty and a renewed interest in gold. With interest rates already at historic lows and quantitative easing as standard operating procedure, global economies are entering unprecedented territory.

There is still little insight into the direction of the economy but since November 2015 to May 2020, the price of gold has risen from $1,146 to $1,726 per ounce, 55% over 55 months.

Gold Going Forward

In an era of tech startups, ETFs, and algorithmic trading, many people consider gold to be a shiny paperweight—however, its performance over time against other assets shows it is far from this.

In 1915, an ounce of gold was worth $488.66 per ounce in today’s dollars and as of May 15, 2020, $1,751 per ounce. Gold has proven its value over time as companies, countries, and governments come and go.

“Golden Bulls” are no periods for idle idol worship. Gold will always be gold, in myth and in fact.

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