As traders we’re looking for systematic mistakes repeatedly made by other market participants. When we find these mistakes, we build nets and go fishing for trading profits.
Our previous approach was to study pre-selected stocks, estimate where other market participants would be trading and stay one step ahead of them. This approach is difficult. This is basically trying to track the feeding habits of sharks instead of just listening to success stories from other fisherman.
Potential investing mistakes in equity markets
- Thinking short term (< 2 years) instead of long term (2-10 years). Proven by Warren Buffet to be the biggest persistent mistake.
- Undervaluing intangible assets (brand value and goodwill especially brand monopolies like “Netflix and chill”)
- Undervaluing impact or adoption of new technology (Google, Microsoft, Apple, Bitcoin)
- Undervaluing first mover advantage of new companies or new products
- Overvaluing potential returns based on the performance of similar stocks
Potential trading mistakes in equity markets
- Index or sector buying/selling hits specific single stocks harder than others (usually during mini-crisis)
- Under-reacting to good news that permanently raises earnings/revenue expectations (a second year of positive revenue growth may cause the street to price in 5-10 years of revenue growth, e.g. TSLA)
- Over-reacting to bad news that doesn’t affect the bottom line in the longer term
Our next step is to design a basic strategy to catch these sorts of fish in equity markets. Stay tuned!