Beginning investors think they know more than they do. Experienced professionals accept uncertainty and are secure in the knowledge that they cannot predict the future.
It is not a harmless affectation to think that you can know the future. It is one of the costliest mistakes an investor can make. Only luck can save an investor who is overly confident in his foresight.
Often, investors spot a trend and think they can make money at it. They think they alone, among millions of investors globally, who spot this particular trend and have the sagacity to capitalize on it. Most dangerous are those who get lucky early in their investing efforts and conclude that they are investment geniuses.
Some investment geniuses exist and I’ve known several. But investment geniuses are much rarer than the number of people who claim that rank. A wise investor I know, compared investing in stocks to mining low grade ore. Picking up a little ore efficiently can make you money if you are patient and work hard. You won’t get rich quickly but over time, the rewards add up.
A common investment mistake is believing that the investment world is static when in fact it is highly dynamic. By way of illustration, consider a trend like the widespread legalization of marijuana. Without doubt, the industry will grow. More marijuana will be consumed, marijuana businesses will add many employees and revenues may skyrocket.
This trend may help investors but it does not guarantee that investors will profit. At the start, there may be no public companies in the industry. Small private companies may dominate. Over time, some of these companies may go public and grow large enough for investors to buy shares.
But if the industry grows fast, soon dozens and perhaps hundreds of companies will spring up to compete for the business. Each company will issue shares and some companies may issue shares repeatedly. As the number of shares of stock in the industry rises, the higher profits are divided among more and more shares. Shares often grow faster than profits. Even if the industry grows faster than the investor anticipates, the investor’s share price may not rise and he could even lose money.
Some version of this sequence has happened many times. In the late 19th century, there was only one automobile company, according to Wikipedia. At the peak, there were 1900 automobile companies. That number plummeted during the Great Depression and by the 1950s, the Big Three dominated U.S. production. Not all the early companies were flops. Some were acquired and their investors made money but many companies became worthless. This is a great example of a big and successful trend. At the start, only a handful of cars were produced. Eventually 17 million or more were sold annually. While the industry had nearly a century of growth, over much of that time, investors were left in the cold.
