Catching a falling knife, sizing positions appropriately and thinking you’re smarter than you are three of the biggest mistakes investors make time and time again, according to Psigma’s Tom Becket (pictured). 
The chief investment officer, who has been at the firm since 2004, said he has fallen privy to these mistakes in the past and has had to learn his investment lessons the hard way.
“All investors make mistakes,” he said. “You can read about some of the famous investors and even they tend to get about six out of 10 of their investment decisions correct.”
In the below article, Becket discusses three of the biggest learning curves he has had to endure and how investors can prevent themselves from falling at the same hurdles.
Catching a falling knife
“One of the first decisions I made as Psigma CIO during the back end of 2008 – having assumed that poison chalice – was to start committing money back to equity markets once again,” he explained.
“Having been very cautiously positioned through 2008, we believed coming towards the very latter stages of that year, that equity markets were starting to become very, very cheap.
“But actually, having seen markets start to fall very aggressively, that was actually the prelude to further falls at the start of 2009.”
Performance of indices 2008 to end of 2009
Source: FE Analytics
One of the key ways to avoid catching the falling knife, according to Becket, is to survey the situation pragmatically as opposed to deciding that stocks are cheap and therefore lower risk from a valuation perspective.
He urged investors only to buy in when fundamentals strongly indicate that markets have bottomed out.
“I’m pleased to report that the falling knife eventually started to correct itself and made a lot of money in 2009 and 2010, but that’s probably the first mistake investors most commonly make,” the CIO added.
Sizing positions appropriately
A second common investing mistake, according to Becket, is backing a single investment decision with too much conviction, as emotional decisions can sometimes outweigh protecting portfolios on the downside.
He said learning about position sizing is absolutely vital whether you are a private retail investor or indeed a pension fund manager.
“Perhaps the biggest example of when we over-committed to an investment decision was to Japanese equities back in 2011,” the CIO said.
“Myself and one of my colleagues went to Japan at the back end of 2010 and were greeted with scepticism and amazement. In fact, one of the managers asked us what on earth we were doing in Tokyo at the time. It had been so long since he’d seen people going there to review his fund as an investment case.
“Actually we saw that as a great contrarian opportunity and started aggressively buying Japanese equities at the start of 2011, then got hit very tragically by what happened around the Fukushima earthquake and the problems around their nuclear plant.”
Performance of indices 2010 to the end of 2011
Source: FE Analytics
Becket subsequently learned that, no matter how much conviction he may have in a set of ideas, it is important to scale those positions appropriately and to expect the unexpected.
Thinking you’re smarter than you are
“There are long periods of time where your style, investment process or philosophy can be out of fashion and, for us, that period happened between the end of 2014 and towards the back end of 2015 when actually you can be fighting against a tide moving in the opposite direction,” Becket explained.
“In particular, you can be backing investments that you think are full of value but nobody agrees with you, and you’re constantly fighting a losing battle.
“My view is you should probably learn from other people’s positioning, try and learn about what other people are saying, rather than just isolate yourself and think about your own portfolios and your only investments as a standalone entity.”
The CIO stressed it is important to retain an open mind and referenced British economist John Maynard Keynes, who said that markets can stay irrational for much longer than investors can remain solvent.
While Becket struggled between 2014 and 2015, he said his high-conviction approach and his positioning paid off in 2016 and is still thriving today.
“It was certainly still a very big lesson we learned in 2015 and, perhaps now, that’s been implemented further within our investment process,” he continued.
“Overall, I think the best thing investors can do is caution themselves against catching the falling knife, make sure they position themselves appropriately and size their positions in a sensible fashion and finally, never try and be smarter than they actually are.
“With those lessons in mind, I think investors will go some way to having success with their own investment portfolios in the future.”