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Swinging for the Fences
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In A LOT of ways of stock investing is like tennis. In tennis, having a killer serve and a great backhand will win you a lot of points, but any advantage that these skills confer can be quickly wiped out with a string of double faults or unforced errors. At the end of a five-set match, it's often the player with the least mistakes "who "wins. Just being able to consistently get the ball back over the net—no matter what your opponent throws at you—counts for a great deal.

Investing is pretty similar. Unless you know how to avoid the most common mistakes of investing, your portfolio's returns won't be anything to get excited about. You'll find that it takes many great stock picks to make up for just a few big errors.

So, before we dive into the company analysis process, I want to introduce you to seven easily avoidable mistakes that many investors frequently make. Resisting these temptations is the first step to reaching your financial goals:

•  Swinging for the fences

•  Believing that it's different this time

•  Falling in love with products

•  Panicking when the stock market is down

•  Trying to time the market

•  Ignoring valuation

•  Relying on stock trading earnings for the whole story

This ties back to the importance of buying great companies with strong eco­nomic moats. Loading up your portfolio "with risky, all-or-nothing stocks— in other words, swinging for the fences on every pitch—is a sure route to investment disaster. For one thing, the insidious math of investing means that making up large losses is a very difficult proposition—a stock that drops 50 percent needs to double just to break even.

For another, finding the next Microsoft "when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.

In fact, small growth stocks are the worst-returning equity category over the long haul. Why? First, the numbers: According to Professor Kenneth French at Dartmouth , 1 small growth stocks have posted an average annual return of 9.3 percent since 1927, which is a good deal lower than the 10.7 percent return of the S&P 500 over the same time period. Lest you sneeze at that 1.4 percent difference between the two returns, let me point out that it has an absolutely enormous effect on long-run asset returns—over 30 years, a 9.3 percent return on Si,OOO would yield about $14,000, but a 10.7 percent return •would yield more than $2l,OOO.

Moreover, many smaller firms never do anything but muddle along as small firms—assuming they don't go belly up, which many do. For example, between 1997 and 2OO2, 8 percent of the firms on the Nasdaq were delisted each year. That's about 2,200 firms whose shareholders likely suffered huge losses before the stocks were kicked off the Nasdaq.

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