Inevitably, every trader and investor will makes mistakes during their career — but it’s how you learn from these trading mistakes that makes them beneficial. It was this topic that Joachim Klement, formerly head of investment research at Fidante and now responsible for the ESG investment strategy at Liberum, has chosen to embrace.
After starring on the podcast series My Worst Investment Ever and being forced to think about his previous mistakes, Klement put pen to paper
“I tried to narrow it down to seven that I think are most common, and thanks to that I've got the dubious honour to now be the only guest who's ever been invited twice to My Worst Investment Ever podcast,” he tells Opto.
In his new book 7 Mistakes Every Investor Makes, published in February by Harriman House, Klement calls upon 20 years of investing experience to break down academic and scientific research of what went wrong on seven different occasions. He highlights what he has learnt from each mistake and the techniques he’s developed to avoid them in the future.
“A major mistake that a lot of people make is that they cling on to their investments for a very long time and then don't think about how long it will take them to come back,” Klement says. “One of the things I would emphasise is that even if you're a long-term investor, you need to have some techniques in place to avoid going down 50% or, even worse, 80%.”
“One of the things I would emphasise is that even if you're a long-term investor, you need to have some techniques in place to avoid going down 50% or, even worse, 80%”
The following is an excerpt from Klement’s 7 Mistakes Every Investor Makes (and how to avoid them), published with permission.
How a relay of misery can lead to good things
I always wanted to write a self-help book. You know the kind of book: if you follow these three steps, you will get rich, smart, beautiful, etc. When it comes to investing, these books have titles like The Instant Millionaire or I Invested in Amazon at the IPO. Here is how you can find the next Amazon. My friends and I call them ‘investment porn’. Most of the time, the only people with any chance of becoming an instant millionaire with these books are the authors.
My problem is that I am plagued by this thing people call ‘conscience’ or ‘integrity’. I know, it’s such a 20th century thing. We live in the 21st century, when the ability to ignore pesky little things like facts and data has seemingly become a necessary condition of a political or business leader. If you want to gain a large following these days, it seems your promises have to be big and your delusions even bigger. But I have news for you: you can only ignore facts and data for so long before eventually “reality hits you hard, bro,” as the kids of a friend of mine used to say.
“But I have news for you: you can only ignore facts and data for so long before eventually “reality hits you hard, bro,” as the kids of a friend of mine used to say”
My career as an investor started in the late 1990s during the technology bubble, when investors were convinced that the internet would revolutionise the world. Every business that was involved in the new economy attracted more money than it could spend and saw its valuations go through the roof.
I was in the middle of this hype myself. On the one hand, I invested in technology stocks in the late 1990s and lost a large amount of money when the bubble burst in the early 2000s. But, on the other hand, I was working in this new economy. I was helping to run a small spin-off company at my university that helped people find jobs via the internet.
I know this sounds quaint today, but back in the mid-1990s setting up a job site on the internet was revolutionary. And business was going well. We made so much money with our little internet company that we couldn’t spend it fast enough. And since we were all volunteers and had regular day jobs, we didn’t have the time to grow the company aggressively. But with the success of this company, came the delusion that starting and running a business was easy.
How wrong we were. In early 2000, the company’s revenue dried up almost instantaneously and our sense of self-importance crashed together with the business. Our saving grace was that we had other jobs and had not burnt through the money the business made in the good times. These savings helped the business survive for the next three years, when it finally stopped losing money.
Today, the company still exists but, just like a quarter-century ago, it is a small business run by graduates of my alma mater as a hobby. Nobody ever got rich from it but, over the years, countless graduates had the chance to learn what it takes to run a business on a day-to-day basis. And the business allowed them to make mistakes on a small scale without endangering their livelihoods.
The mistakes I made during the technology bubble, both in running a business and as an investor, stayed with me for the rest of my life. They inform my decisions to this day and will likely continue to do so.
“The mistakes I made during the technology bubble, both in running a business and as an investor, stayed with me for the rest of my life. They inform my decisions to this day and will likely continue to do so”
But while these mistakes were amongst the first I made, they were by no means the last. Instead, they just set me off on what I like to call my personal relay of misery. Sometimes, I look back at my career as an investor and it seems like I just went from one mistake to the next. The fact is, investing is not simple. No matter what self-help books try to tell us, there is no simple or quick way to success. Mistakes are inevitable …
This book is my effort to help investors become better. I won’t do it by promising you a quick way to investment success. Instead, I can only offer you a look at the blood, sweat and tears I have spilled over the years to get better myself. My hope is that as you read about the mistakes I have made, you will be able to avoid them yourself and learn faster than I did.
The problem with this endeavour is that I have made so many mistakes that they could fill a small library. However, in my experience, there are some that are more common than others. Equally, some actions are often not even recognised as errors in the broader investment community, but instead considered good practice.
“My hope is that as you read about the mistakes I have made, you will be able to avoid them yourself and learn faster than I did”
In this book, I focus on the mistakes I made as an investor that I think are very common. I see other investors, both private and professional, make them today. In fact, while this book is written in an accessible style that is geared towards private investors, professional investors will likely benefit from it as well. While they may be aware of the pitfalls explained in some chapters, they might not be aware of others and may still make these mistakes today.
In every chapter, I not only review the mistakes, but show why a particular investment habit can lead to poor performance. Remember, this is an honest self-help book and thus, I want to help you help yourself.
Most importantly, I also present the scientific evidence for why these mistakes are bad for performance. At the end of each chapter, I explain the tools and techniques that I have developed over the years, and that I use in my investments, to avoid these mistakes and create better performance.
“At the end of each chapter, I explain the tools and techniques that I have developed over the years, and that I use in my investments, to avoid these mistakes and create better performance”