The Playbook For The Modern Man

Investment Guru Debunks The Naive Investing Psychology Australians Need To Grow Out Of

… and the siren call you should ignore.

Investing is a tricky business. But many rookie investors fret about the wrong things. While there are innumerable mistakes fresh thumbed traders make, there is one in particular we need to overcome, one Australian investment guru claims.

In response to “yet another free US brokerage mob” launching in Australia (which has come about after individual trading has seen a boon of late), Scott Phillips, Chief Investment Officer at The Motley Fool (a membership-based investment service) took to Twitter to say: “‘Free’ sells like nothing else. Makes otherwise sane people crazy.”

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So far so doom and gloom.

But here’s where things get interesting. Instead of worrying about the brokerage fee of each trade, Phillips urges traders to think more carefully about the trade itself. Obvious? Sure. But one of the biggest mistakes rookie traders make is making lots of little bets, based on tip-offs they heard at (among other places) Ryan’s Bar, figuring there’s not much to lose in having a dabble (then six months later realising they’ve wasted their money on a bunch of highly speculative roulette spins).

Investing with a brokerage fee (rather than on a free-trading app) will dissuade people from making this error, Phillips claims.

“Behavioural psychology has a lot to say about ‘free,'” Phillips wrote in a separate tweet. “It’s a drug: Addictive and boundary lowering/reducing.”

“You really think we should encourage people to trade more??? This will make a lot of people a lot poorer, because they’ll convince themselves they’re ‘investing’…”

Of course, one could argue, Phillips, being CIO of a membership-based investment service, has a dog in the fight. But, as comments made on a recent episode of The BIP Show illuminate, at least part of his point (don’t make lots of speculative trades) is solid advice.

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On a recent episode of The BIP Show podcast, James Whelan, Investment Manager at VFS Group in Sydney, explained why making lots of little punts, even if they are ‘free,’ isn’t necessarily the best idea: “You duck down to Ryan’s Bar, catch up with your mates, they say, ‘I’ve got a red hot tip for you Jimmy, you’ve got to get onto this one… they’re in Sierra Leone and they’re digging ants out of copper mines.”

“It’s just the biggest load of baloney… [but] you do a cursory look and purchase.”

“It’s the worst possible idea – you don’t know anything about it, you’re not that close to the company, it’s probably going to be a terrible idea anyway and there’s every likelihood that… on the other side of it someone is just selling into your buying.”

“The mistake overall I would say is that… if you’re not close to it, don’t even worry about it – at the small end of the scale.”

“It’s easy to keep up with what the HP’s are doing or CBA, Apple or Amazon because it’s in the news and it’s well disclosed. But the worst mistake you can make is to have a whole shoebox full of these [speculative] pieces.”

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