How avoiding 'wide deliveries' can improve your investment record

Extras (wides and no balls in particular) essentially would be equivalents to an 'unforced error', a term used in the sport of tennis. 

As defined on Wikipedia - an unforced error is "an error in a service or return shot that cannot be attributed to any factor other than poor judgement and execution by the player." 

So now, let's make a small tweak to this. An unforced error is 'an error in a service or return shot buying decision that cannot be attributed to any factor other than poor judgement and execution by the player investor.' 

And... Voila! We have a very apt investing lesson here... 

So the key question that comes to mind is how can an investor avoid 'unforced errors' when it comes to his investing track record? 

Here are some simple ideas that come to mind: 

• Avoid buying something you don't understand or know anything about - Know why you are buying a stock; have a good understanding of the business; and where the company stands in the overall scheme of things.
• Avoid paying up for lack of quality
• Avoid buying into businesses with questionable managements - No rocket science here.
• Avoid over exposure - While a concentrated portfolio is one that has its pros, diversification is a way to go about things for the risk-averse investors.
• Avoid being fully invested - Not having enough cash to make most of market follies can be quite frustrating.
• Avoid relying on short-term data for making investment decisions - Rather it would be advisable for one to look at how companies have performed over an economic cycle - about a decade - to gauge whether they would be able to weather through difficult times going ahead.
• Avoid buying value destroyers - Why would one want to buy into a company which earns returns less than its cost of capital? As simple...

Warren Buffett has infact claimed that one of his greatest errors is the 'error of omission' rather than the 'error of commission'. This means that he could have made far more money with investments he avoided as compared to the money he lost in his bad investments. But here we are talking about a man who has his emotions very much under control! 

For investors who are not able to manage the same, it would be wise of them to avoid not making the 'error of omission'as they could easily get swayed by the 'hot' money making opportunities that are presented to them. 

In short, the risk-reward ratio should be well understood. 

By Devanshu sampat