Here’s how you can learn from my five biggest investment mistakes

Earlier this year I shared with you what I considered my biggest investing mistake, but it was as much a commentary on the real value of long-term investing as anything. Today I want to share some specific mistakes, ones which in hindsight make me look like a bit of an idiot — but if it helps you avoid the same traps, I can live with that.

I’ll get my most embarrassing one out of the way first…

Borrowed money

I have invested in shares while simultaneously being in unrelated debt. And there was even a little bit of credit card debt thrown in too. Yes, bad, isn’t it?

If you invest, say, £1,000 in shares, you’ll probably have to pay around £10 in fees, plus 0.5% stamp duty, and you could easily face a spread of 1% too. So you’d have to make a return of around 2.5% just to reach the point where you’d break even if you sold. 

But suppose you have debts costing you even a modest 5% per year in interest. You need a return from your shares of 7.5% in your first year to break even, then 5% per year just to stay afloat. With the FTSE 100 averaging something around 6% per year long-term, that’s cutting it fine — never mind in the past five years when it’s grown by just 18%.

And if you’re holding credit card debt too, which could be costing you up to 30% in interest, you have no chance.

Short-term cash

A few years ago I had a bit of money set to one side, which I intended to use for something in about six months time. So did I just leave it in a bank, earning practically no interest but at least safe for when I needed it? Nah.

Thinking that over the long term, even short-term ups and downs with short-term cash would even out and I’d probably come out ahead. But that doesn’t actually help if you mess it up once and lose some cash that you actually need.

So I went ahead and bought shares with it, but you know when that was? It was not long before the financial crisis started to unfold. And guess what I bought? Barclays. I was fortunate that I sold again before the worst depths, but I did lose about half my money — and I lost it stupidly, by ignoring a key investment rule.

Investing in shares is way better than cash, but not with short-term money you know you’re going to need soon.

Understanding the business

Many years ago, I followed a PEG-based approach to finding growth shares. That in itself isn’t so bad, but my big mistake was to allow one of my automated rules to override common sense. I used to screen for a relatively modest forecast P/E multiple (I can’t remember what figure I used now) and PEG ratios of 0.7 or lower based on two years of earnings growth forecasts — where the PEG relates the P/E to the expected growth rate. And then I’d pick the tastiest looking figures from what came through.

I bought shares in a company that ran a chain of nightclubs. It prompted a friend to say: “You know how to pick a share that’s already gone up, don’t you?“

Yes, the price had soared over the previous two years. And yes, it subsequently collapsed again and I lost a chunk of money. What I’d neglected was the nature of the business. It was in a very competitive market and, more importantly, a market very much subject to fad and fashion — and the fashion moved on.

Trying to time it

In September 2015 and after watching the oil price slump, I concluded that it just couldn’t keep on falling forever. I was obviously right on that point, as were all the rest who understood that simple fact. But I made the mistake of thinking that I had some idea of when the bottom might be… and that we were at or near it.

So I bought some Premier Oil shares at 99p, and then watched the oil price crisis continue and saw my shares crash to 19p apiece… and then trading was suspended.

Since then there’s been a recovery to 130p and I’m actually now in profit, and looking at the share price today I could try to convince myself I made a good call. But I didn’t. That investment survived by pure luck and it had nothing to do with my skills at all. The fact was, Premier Oil faced a very real chance of going bust, and if the oil price had stayed down there for much longer I could easily have lost the lot.

A fortunate result, but a very silly move trying to time the market.

Diversify

I do believe that diversifying just for the sake of getting into a variety of sectors is a bad idea. That’s down to the fact that an awful lot of investors will often buy a stock that they wouldn’t buy if they weren’t trying to diversify. That is a mistake, and it is one that I’ve never made — you should never buy a share for any other purpose unless you would buy it on its own merits alone.

I’ve seen investors buying 15, 20 or more individual stocks, plus a few investing funds, purely for diversification — and a lot of professional advisors get rich by recommending just that. But isn’t that the perfect recipe for achieving… average? If you’re going to do that, I say just buy an index tracker and save all the time and fees.

But having said all that, I’ve rarely held more than four or five individual stocks at a time, and right now I own just four — and two of those are in the financial sector. While I don’t rate this as the biggest of my biggest mistakes, I’m getting ever closer to retirement and I’m at too much risk of a single-sector or single-stock collapse. I really must do something about it.