Mixing your investments with other financial goals in the same product.

Financial institutions love selling complicated solutions. The reason for that is, the more opacity there is in the package, the greater the freedom they have to add layers of charges. Another reason: it allows their salespeople to confuse their prospects enough to have them believe whatever they want them to. These solutions, such as structured products or investment-linked policies (ILPs), are often marketed as having multiple benefits. What they would like you to ignore is that these products do have several caveats and drawbacks. Besides the higher inherent costs, there may be lock-in periods where you can’t make withdrawals, or pay heavy penalties for doing it. 

Our suggestion: keep things simple. Buy solutions that serve one specific purpose that you understand, and at the cheapest cost that the market has to offer for it. For example, as the famous saying goes: “buy term (insurance), and invest the rest”. And your investments are also well-placed if in highly-liquid, low-cost, passively-managed, index-tracking exchange traded funds. 

Not knowing that Mr. Market is manic depressive.

Warren Buffett says “in the short run the market is a voting machine, whereas in the long run, it is a weighing machine”. With those words, he is reminding us that in the short-term – hours, days, weeks, even months – no one can accurately predict how the market moves. But in the long-term, the prices eventually will reflect the intrinsic value i.e the real strengths of the investment. This is because in the short time frame, the market is highly dependant on people’s sentiments about all kinds of issues – even if these issues don’t affect the market or a particular stock directly. 

This means there are often tremendous over- and under-reactions to news. As a group, people can’t be certain what the true current value of an asset is, after considering its risks. So they keep moving the price up and down, every second sometimes. What’s more: the market prices can stay unreasonably elevated or strangely depressed for long periods of time. All the while, the fundamentals may suggest a completely different reality. This is where a value investor, being a patient and independent thinker, can see huge opportunities for profit.

Not knowing that “smart money” is often not that smart. 

“Smart money” in the financial world usually refers to “big money”. These are the investment resources of large institutions and funds, typically deployed on behalf of their clients. 

Why call it “smart money”? 

This is because there is a notion, i.e. an assumption, that these giant corporations have teams of analysts and expensive data systems that can arrive at the best decisions. 

While this can seem quite logical, because of various factors, on hindsight the choices that are ultimately made can seem ludicrous. 

These factors include short-term thinking, unreasonably high targets, easy lines of credit (called margin), and huge incentives to take risks with other people’s money. 

This is why, in a vast majority of cases, the simple index beats the returns of actively-managed and expensive funds over several consecutive years. 

What that means for us as investors is that we can, and should, ignore the marketing spiel of these formidable brands, and do our own thinking for our money.