In our transition from an institutional money manager to an independent research provider for individuals, we’ve noticed many common trends in individual investors that make them different from institutional investors. In an earlier column we discussed some of the mistakes investors make, but in this column we will discuss some of the worries individual investors have, and some of the traits they have in common when trading their portfolios.

Most investors, naturally, want to buy stocks that are “cheap”. Nobody wants to spend too much. Perhaps it is the mentality of all the stores that are constantly bombarding you with “Sales” and “Clearances”. No shopper in their right mind would ever pay full price for something, would they? This has carried over into the investment field. Individuals want stocks that are not very expensive. But guess what? Many, many times, most investors discover that ‘cheap’ stocks are not necessarily ‘good’ stocks. Maybe a stock is cheap because it has lots (too much) of debt. Maybe it is cheap because earnings are not covering the dividend. Maybe it is cheap because sales are slowing or turning negative (never a good sign!). Nope, just like clearance-sale merchandise, some stocks are cheap because the seller just wants to get rid of it, because something is wrong with it.

Individual investors also like to take profits a lot. We understand this of course. Five years of brutal equity market conditions, overlain with the worst recession since the depression, makes all investors nervous. But we think many investors are taking profits because it ‘feels good’ to actually make money for a change. Locking in a profit helps relieve those still-painful memories of 2008/2009. Taking a profit of 25% means, hey, you still have it—that ability to pick a winner. Who doesn’t like that feeling? However, if we’ve told you before we will tell you again—you need to leave feelings out of the stock market. Don’t sell your winners unless there is a compelling, fundamental reason to do so. To feel good about the market again is NOT a good enough reason!

Individual investors also need to understand dilution better. Companies that willy-nilly issue stock on a regular basis should be avoided, or at least examined very closely before buying. Companies that hardly ever issue stock should be rewarded, and maybe bought. Recently we looked at two companies: Constellation Software and Yukon Nevada. They couldn’t be more different. One is a software company and one is a gold producer. But the difference in share count is stunning. According to Bloomberg data, Constellation in 2006 had 21.2 million shares. The same year, Yukon had 58 million. Today, Constellation has a market value of $2.4 billion; Yukon has a market value of $304 million. Constellation’s share count is now….exactly the same as in 2006 at 21.2 million. Yukon Nevada, well, not so much the same: It has 997 million shares outstanding today. Investors need to understand that the more shares there are, the harder it is to make money.

Lastly, somewhat related to an earlier point, is that individual investors are still too worried about an impending collapse in the market. We are not trying to dismiss any market risks, here, but if you are constantly looking over your shoulder worrying about an impending collapse then you are going to be missing potential opportunities right in front of you. If you are overly worried, you are going to trade too much, and may mistake a normal drop in a stock for something much worse entirely. You—potentially—could miss out on years, even decades—of decent returns and dividends if you are constantly looking for signs of doom. Forget it. You, nor I, will be able to predict what the next disaster is, let alone the timing of it. Be careful, yes, and do your homework on individual companies. But don’t wrap yourself in protective bubble wrap and ignore any positives out there. There are some good things going on, believe it or not, but you need to be actually looking, not hiding.