In life, it is often said that it is the chances you don’t take that you regret the most. When it comes to the world of investments, however, taking a chance on a company that fails can be just as painful.
Private investors will always make mistakes when investing – unfortunately there are no two ways about it – but they should take heart that even the best of fund managers are wrong a lot of the time.
Adrian Lowcock, investment director at Architas, said: “Most investors are no more skilled than the rest of the market. Whether you are a fund manager or a private investors your skills are not considerably more than your peer group.
“Most fund managers are in a range and maybe with private investors it is a wider range but even Warren Buffett who is at the top of his peer group is not so out there that it is unbelievable.
“If a fund manager is right 55 per cent of the time then they will be one of the best fund managers in the world so managers are used to being wrong.”
Getting over these mistakes quickly and learning from them is the key, according to AXA veteran fund manager Nigel Thomas.
The manager of the £3.3bn AXA Framlington UK Select Opportunities fund said that if you don’t invest in a stock because you don’t like the management, the company or the sector but it does well, then so be it.
“It is less intellectually annoying because the chances are, you probably would not have invested in it anyway,” he added.
What is more disappointing but is something that investors can at least learn from, according to the manager, is buying a stock that underperforms.
“In my opinion investing in stocks that do not do as well as hoped is more intellectually important; you are always learning from your mistakes,” he said.
“It is also important that when you get it wrong, you lose as little as possible so you have a chance of recouping that capital.”
This discipline of avoiding extreme losses and proactively selling out of mistakes as quickly as possible to limit the downside has stood the manager in good stead during his 30-year career.
Indeed, the fund has been a top-quartile performer since Thomas took charge in 2002, returning 401.37 per cent, beating both the FTSE All Share and IA UK All Companies sector.
Performance of fund vs sector and benchmark since manager start
Source: FE Analytics
Importantly, the fund has a lower monthly maximum drawdown than the rest of the sector over this period, with fewer negative monthly periods and a top-quartile Sortino ratio (which measures risk-adjusted returns while taking ‘positive’ volatility into account).
Conversely, Rathbone’s chief investment officer Julian Chillingworth said it is more annoying to mis-read a company and therefore miss out on substantial returns.
“In my experience of having done this for over 30 years you have got to realise that you are not going to be right the whole time,” he said.
“You have to get into the right mind-set that you are going to make mistakes and that is an important crossing point. Because often, when you’re young and you start in this business you think that every stock you select is going to go to the sky but it doesn’t work like that.
“I think people also have to come to terms with the fact that you can do all the analysis in the world but you need to accept that there can be left-field events completely outside your control that can drive stock prices down for reasons you won’t have thought of.”
However, investors can beat themselves up more about the stocks that they didn’t buy than those that they did, the former manager of the Rathbones Recovery fund added.
“I also think that often you can do correct analysis but you may have not placed as much importance on one certain area of the business which later comes back to slightly haunt you,” the CIO noted.
Learning how to avoid this mistake comes with experience but also knowing where the market is in terms of its business cycle, Chillingworth said.
“Obviously if a business is a cyclical business and the economy is with you, the share price will be more forgiving. If you are in a downturn, the business cycle isn’t with you and you have a business under stress, small errors by the management team can actually be exacerbated quite a lot.”
A recent example of a company that he has not bought and somewhat regretted is budget airline EasyJet, as the CIO said he does not own any travel stocks as a rule.
The stock fell 43 per cent from June to October last year as investors feared for that the Brexit vote may impact the number of UK people travelling abroad. However, since it bottomed out in October the company is up 60 per cent.
Performance of stock since EU referendum
Source: FE Analytics
Chillingworth said: “I have a very strong rule that I don’t buy airlines but some of my colleagues were getting very enthusiastic a little while ago about EasyJet and the recovery path it was on.
“Indeed the business has dramatically recovered so you could have made a lot of money but as has been demonstrated in the last few weeks with Monarch, airlines are particularly economically sensitive and often quite heavily borrowed and that’s why I don’t like them.”
Overall, Architas’ Lowcock said fund managers are probably better at getting over these mistakes as they have an entire portfolio of stocks. While one mistake is annoying, he pointed out that it is usually counterbalanced by a stock pick that has done well.
As well as this, the scale of the fund versus a private investor means that they should, by and large, be better at getting out of these so they are less likely to regret a mistake for longer. 
He said what likely annoys managers most is misjudging a company rather than avoiding an outperforming stock on the grounds that it does not fit in with their process.
“A lot of managers don’t own Amazon because the valuation is too high and they can no longer justify it in their process so they won’t regret it but where they get something wrong it is probably more annoying.
“What they probably do is regret not following their disciplines - so a mistake they should have avoided if they had followed their rules more strictly.”
For private investors it can be easier to regret not buying a company as well as those that go wrong – making it doubly difficult.
For investors choosing funds, Lowcock said the main mistake to avoid is chopping and changing a portfolio too often.
“The biggest mistake you will make, particularly buying funds, is trading too often and trying to chase performance,” Lowcock (pictured) said.
“Just because a fund you have bought is not performing at the moment, it doesn’t mean you should sell it – there is so much evidence to show that if you don’t tinker with your portfolio you will do much better than if you do. It is unbelievably compelling.”
If in doubt, he said it is better to “take a profit and leave a bit for someone else” than to turn a success into a failure. He also said not to dwell on mistakes if it causes you to second guess yourself and your process.
Conversely, he noted it is just as important to enjoy the successes you make without believing you have cracked some sort of formula to investing.
“If you do have successes do not let them go to your head as it is amazing how quickly you can believe your own success,” he said.