Investment myths have the potential to affect even the most seasoned of investors. However, the man on the street can avoid making expensive mistakes by being aware of these common inaccurate assumptions.
Linda Eedes, investment professional at Regarding Capital Management (RE:CM), said that one of the common mistakes made by investors is to link positive economic growth to positive investment returns, which is not always the case.
“Investors should be wary of basing investment decisions too heavily on the plethora of economic data they are exposed to on a daily basis, such as GDP growth rates, inflation data, manufacturing and production numbers, various confidence indexes and rating agency and economist outlooks. A recent study, which analyses 83 countries over a period of the 30 years, confirms that areas of highest growth do not necessarily generate the best investment returns. The report reveals that the best investment returns were generated from the countries that experienced lowest economic growth” said Eedes.
She added that investors also tend to think that poor economic returns lead to poor investments, which is certainly not the case. “An example of this is RE:CM’s investment in Carrefour, the second largest retailer in the world after WalMart. We started investing in the company during 2012, at the heart of the macro-economic recession in Europe. Carrefour is a high quality business and when we invested, it was trading at less than its property book alone. Since the initial investment in early 2012, the share price has increased by 35% in US Dollar terms,” said Eedes.
Uncertainty should not always be avoided
According to Eedes, investors tend to avoid areas of near-term uncertainty at all costs, which is not always the best route when making long-term investment decisions. “A good example of this is Greece. A year ago, Greece faced great economic uncertainty. This led to investors shying away from the region,” said Eedes. Because of the uncertainty and negativity surrounding Greece, RE:CM were able to invest in high quality businesses trading at exceptionally undervalued levels.
Luke Hirst, debt counsellor at DebtBusters, added that an economical investment should allow you to freely, and cheaply, draw the funds out at early stages of the investment term.
“The easier it is to access the funds, the more chance there is that the consumer will draw it out prior to the intended investment term. A savings account with very high fees and charges will offset the potential interest earned, especially where small amounts are invested by low-income earners,” said Hirst. According to Hirst, those who want to invest for several years should look at RSA Retail Savings Bond for some of the best interest rates.
A good company is not always a good investment
Another common myth amongst investors is that a good company is always a good investment. “There is a mindset amongst many investors that if they purchase a good, solid company’s shares, it will without a doubt be a good investment over time. This is not always the case,” said Eedes.
According to Eedes, it is very important to place significance on the price relative to the value of the investment. “By carefully selecting stocks of high quality at reduced prices, we believe that positive investment returns can be generated over time.” she added.