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Avoid These 3 Common Investing Mistakes

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Steve Cohen, the billionaire founder of the hedge fund Point72, knows a thing or two about mistakes to avoid in investing.

Cohen has been trading since the 1980s, started two hedge funds, amassed a $19.8 billion net worth per Forbes, and was named to Institutional Investor’s Alpha magazine Hedge Fund Hall of Fame in 2008. He started Point72 after SAC Capital, his former firm, pleaded guilty to securities fraud linked to alleged insider trading.

In a 2021 interview with Jawad Mian — founder of the investing newsletter Stray Reflections — which was publicly released as a podcast for the first time this week, Cohen advised on three ways to minimize inevitable losses.

First, Cohen said to avoid being too illiquid. This means having a comfortable share of your portfolio in assets you can sell quickly for a fair price. Some illiquid assets might include real estate and fine art. Having a high level of liquidity allows investors to swiftly move their money when and to where they see fit.

Second, don’t be over-leveraged, Cohen said. Using leverage means investing with borrowed money. The upside can be substantial when using leverage, but this also means that the downside can be disastrous, leaving an investor on the hook for the lost money.

Third, don’t have too much of your portfolio concentrated in a small number of assets. Some legendary investors, like the late Charlie Munger, are actually in favor of higher concentration levels, as the upside can be greater.

“I think it can be a rational choice, in some situations, for a family or a foundation to remain 90 percent concentrated in one equity,” Munger said in his book, “Poor Charlie’s Almanack.”

However, the risks can be higher, and diversification can protect against losses in some investments.

“If you’re in illiquid stuff, that’s a problem. If you’re using too much leverage, that’s a problem. And if you’re too concentrated, that’s a problem,” Cohen said. “If you have one of them, maybe that works. If you have two of them, uh oh. If you have three of them, you’re whistling past the graveyard.”

He continued: “It works until it doesn’t. I’ve seen it over and over again. You just have to be careful.”

2 things to ask yourself when you’re in a trading slump

Mian also asked Cohen what he does when he’s on a losing streak to get back on track.

Cohen said he asks himself two things. First, whether or not he’s changed his investing process at all. And second, if he hasn’t changed his process, what is he missing in the market?

“I’m focused on my losers. Am I missing something? Is there something changing?” Cohen said. “If I feel like something is changing or I feel like I don’t know why, I will reduce.”

“Weekends are a really good time to think about things because your mind’s a little more free,” he continued. “Analyze why it’s happening and be thoughtful about it as opposed to just attributing it to, ‘Oh I’m not working hard enough, I’ll work an extra two hours.'”

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