Confessions of an Analyst: My Five Investing Mistakes

He's making a list, and checking it twice! Except this list is a bit different, and is full of broken investing rules!

Adam Fleck, CFA 19 December, 2023 | 9:29AM
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It probably won't surprise you to hear that, as a long-time equity analyst, I'm also a long-time equity investor. But despite my experience, I'm far from perfect. I've made my fair share of investing mistakes, some of which are admittedly ongoing.

Following in the footsteps of my colleagues Christine Benz and Amy Arnott, I thought it may be helpful to outline the investing rules I most frequently break. The goal is not merely self-flagellation. Instead, it's hopefully a reminder that perfect need not be the enemy of good enough. Starting along the investment journey with the goal of ongoing learning and improvement is often the best strategy for long-term success.

With that in mind, here are five common investing sins I'm guilty of committing:

I'm (Probably) Too Heavily Invested in Equities

My investment portfolio consists of both my retirement savings and a separate taxable account that is focused solely on individual stocks.

Putting these together, my invested capital skews 82% equity and 18% fixed income, far from a common 60/40 portfolio or from rules of thumb such as allocating 100 minus your age to equities (although, as much as it pains me to admit, the balance is closer to the modernised 120 minus your age).

Given that my retirement savings balance alone is already skewed 70% to stocks, doubling down in my taxable account by focusing only on individual stocks is arguably adding too much risk, especially at a time when bonds are looking increasingly attractive.

My Stock Portfolio Has Home Bias

Roughly 70% of the equity portion of my combined trading account and retirement portfolios is in North American equities. This home bias is even more pronounced in my direct-equity taxable account, where 15 of the 16 stocks I own are traded primarily on US exchanges.

Meanwhile, 25% of my total portfolio is invested in other developed markets like the UK, Europe, and Japan. (As an aside, despite leading Morningstar's equity research team in Australia for nearly five years, my former Sydney colleagues may be disappointed to learn I don't directly own any Australia-listed securities in my self-guided trading account. Sorry, mates!)

This leaves just 5% invested in emerging market equities, trailing the global market-cap weighting of 8%. While some of the companies in my portfolio are undoubtedly tied to the fortunes of geographies like Asia or Latin America, it may be worth considering some direct investment in developing-markets stocks.

My Trading Account is Too Concentrated

My equity portfolio consists of just 16 individual stocks, below the typical risk-reducing guideline, which recommends holding at least 20 single names. This effect is less relevant when considering all my investments, including the funds in my retirement account, but arguably an increase in diversification may be appropriate.

Of course, too much diversification could drive my portfolio's returns to be much closer to an underlying index, muting the effect of my convictions. I want each stock to have a meaningful contribution to the portfolio’s performance when I think there’s a sizeable margin of safety in a name that could generate solid risk-adjusted returns. Admittedly, 16 stocks may still be too few, as my colleagues wrote in 2017, but the sweet spot doesn’t appear to be many more, just 20–30 stocks.

I'm Overweight Large-Cap Stocks

The Morningstar US Market Index is weighted 73% to large-cap stocks, which is to be expected given market-cap-weighted construction rules. But my individual trading portfolio goes even further, with 83% weighted to the largest companies.

This overweighting could again be seen as an undue increase of risk. However, it's also a product of my personal investing style. I generally tend to invest in companies with durable competitive advantages, an "Economic Moat" in Morningstar parlance. and each stock in my taxable account has been assigned a narrow or wide Morningstar Economic Moat Rating (or had been assigned this rating, if no longer covered). There is also a strong propensity for larger-cap companies in the US to have a narrow- or wide-moat rating.

Now, this doesn't mean that being large directly leads to durable competitive advantages. If anything, the causation may flow in the opposite direction: large-cap stocks may have built their heft by holding competitors at bay over long periods. But nonetheless, building a portfolio of individual US stocks focused on moats, particularly wide ones, often means concentrating on large-cap names.

I Rarely Sell Shares

Staying invested is important. My recent research shows trying to time the market is generally not a profitable endeavour versus a steady buy-and-hold strategy over the very long term. But sometimes, stocks get expensive, and it may be worth selling to make room for other, more-attractive ideas.

While I generally aim to hold securities for very long periods – I’ve owned Berkshire Hathaway [BRK.B] since 2009, for instance – I’ve been guilty of overstaying my welcome as a shareholder. My most recent mistake is Merck & Co. [MRK]. The stock's price now sits close to its estimated fair value, but in hindsight, I could have avoided quite a bit of recent pain if I had sold when the name screened as more than nearly 20% overvalued in early 2023.

Luck and Judgment

Despite these many faults, my investments have generally performed in line with my expectations and risk tolerance. I feel lucky to have been able to take advantage of opportunities presented to me and don’t take anything for granted.

But in the spirit of continuous improvement, it’s helpful to see my list of broken rules. Some are acceptable, but others are products of inertia, knowledge gaps, or simply a lack of time. Regardless, the above list has me already thinking about 2024 New Year's resolutions, with the hope of building even greater success. I hope you'll find it useful, too.

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The information contained within is for educational and informational purposes ONLY. It is not intended nor should it be considered an invitation or inducement to buy or sell a security or securities noted within nor should it be viewed as a communication intended to persuade or incite you to buy or sell security or securities noted within. Any commentary provided is the opinion of the author and should not be considered a personalised recommendation. The information contained within should not be a person's sole basis for making an investment decision. Please contact your financial professional before making an investment decision.

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About Author

Adam Fleck, CFA  Adam Fleck is an associate director of research with Morningstar.

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