London, UK-based European Head of Credit Chris Linkas shares some investment tactics, widely known among the pros but not so well known by private investors.
As a starting point, it’s critical that an investor never overestimate the capabilities and technical savvy of their investment firms’ experts. While expert implies a certain mastery of knowledge, it can be deceptive, notes Linkas, when an investor assumes that it equates to omniscience.
Their expertise is relative to the knowledge of a non industry investor. Institutional investors make plenty of mistakes, all of the time. Market decisions are always based on incomplete information and expert miscalculations abound.
Sometimes professional investors even misjudge their own knowledge, overstepping sound market wisdom, blinded that they are chasing a failing investment all the way down to the bottom, while in their minds they believe that they have spotted an opportunity missed by the rest of the market.
There’s an old investment adage that goes something like “buy on the rumor, sell on the news.”
However, these days, lots of investors are buying on the rumor, driving stock prices to unrealistic over-valuations that price corrects once the news is officially released.
Many an investor has been left holding the bag, thinking that they had gotten a piece of insider information about an upcoming merger or takeover that was going to return previously unheard of profits, only to find themselves merely breaking even, if they are lucky and more often than not, selling at a considerable loss.
Chris Linkas points out that lots of momentum traders are buying stock on short trend upswings and selling as the hype dies down and then moving onto their next price run.
Another area where Linkas finds private investor information inaccurate is in a widely held belief that certain “safe” investments are shielded from market downturns.
The truth is, Linkas shares, that not only can they take huge losses, in bearish markets, they frequently do.
Keeping an open mind on discarded stock picks can produce nice returns. It’s important the former head of commercial real estate points out, that permanently writing off a poorly performing investment not permanently alter the investor’s open options with reconsidering the pick again at some point in time.
He points out a case where a stock dropped from its portfolio had a management turnaround and made several very smart decisions that resulted in a nearly $30 per share acquisition.