Investing in the stock markets can be tricky and you will probably lose hell a lot of money even before making any if you lack the right guidance. Thus, as a beginner, it’s important to avoid making the common mistakes that others have made.
In fact, these mistakes offer paramount lessons for you to cut short your learning curve and make money from the stock markets faster. I have listed 7 of them below:
#1 You plan to fail when you fail to plan
Would you gather some wood and nails and just start hammering away with the hope of completing a DIY wooden table in the house? Definitely not!
You would probably measure, draw the pattern, research which type of lumber and fastening supplies to procure, look at other completed decks for inspiration and finally begin the building process.
Likewise, designing a plan before you head into stocks investing is of vital importance.
You need to specify your goals such as:
- What is it that you want to accomplish with your investing?
- Figure out what risks you’re willing to take to achieve this goal
- How much money can you allocate to your investing practices
- At what threshold do you need to achieve before you consider your investment a success?
#2: Procrastination strikes!
So you’ve done your homework. You’ve found a couple of potential heavy hitters that have piqued your investing interest.
You watch these stocks closely as the stocks keep making consistent gains and break out from their new highs. However, you are reluctant to buy them at such “expensive” prices, hoping that they will fall slightly before you make the purchase.
Long before you know it, you’re essentially watching as your potential profits “fly away” and the stock may never hit your “target price” again.
Many investors make this mistake of waiting too long to pull the trigger and miss out on massive returns. Developing a concrete Buy-&-sell strategy allows you to remove any emotions attached and help you to do what is right.
#3 Jumping In and Out of your “investments”
Many new investors (me included!) join the stock markets with big hopes of making the next pot of gold. They fall prey to those hyped-up trading courses which promises them quick gains without much effort – all you need to know is how to buy and sell following some indicators.
However, mark my words… joking.. Instead, here is a quote from Warren Buffett’s:
“We continue to make more money when snoring than when active.”
A flashback at the number of legendary investors including Warren Buffett, Peter Lynch, Walter Schloss etc points out one simple fact:
They have made their fortunes through careful analysis and holding them for the long run, and not jumping in and out of the markets to make a quick buck.
Countless reports have also proven that timing the market is a foolish thing to do because of one simple thing:
If professional fund managers who has the superior resources and capital are unable to win this “timing the market” game, what makes you think you can?
#4 Holding onto Losses
Here is some sound advice from veteran stock investors (a few of them my friends).
If a particular stock is making losses, & you’re looking to hold on until it at least recoups what you have lost….
Stop. Stop Now.
Sell the shares of that stock, & Use the funds to purchase another stock with better fundamentals.
You stand a better chance to regain whatever losses previous incurred and even make extra going forward.
#5: Diworsify:
In case you don’t know what the name means: It is to make something worse by diversifying.
And yes, You probably have heard it many times before:
“You can’t go wrong by Diversification as it helps you minimizes your risks”
However, nothing can be further from the truth.
As investors we are often told things like “diversification is your only free lunch” and that studies by people at fancy institutions such as Harvard, Yale and MIT have shown the most important decision you can make as an investor is the asset allocation decision – that is, how to diversify capital within and across asset classes.
The concept is simple – just buy stocks from different sectors and there you have it – Diversification!
However, the reality is far from it. Owning too may investments can result in below-average risk-adjusted returns due to…
- Analysis-paralysis – over-analyzing (or over-thinking) a situation so that a decision or action is never taken, in effect paralyzing the outcome.
- Substantial Increase in Investment costs – imagine buying every ASSET there is to diversify – bonds, gold, foreign equities, alternative investments (Oh my… God)
- Layers & Layers of required due diligence (how are you going to keep up with the update of every single investment?!)
To sum up, I borrowed a quote from Warren Buffett:
“Keep all your eggs in one basket, but watch that basket closely”
#6 Chasing the “Hot” Stock
herding, leads investors to the popular stocks and hurts their performance: “Investors may favor stocks that are in the news or when information is most readily available, ignoring the stocks where information takes more work to dig out.” The solution: “By its nature, a strategy that focuses on buying the less popular stocks will be contrarian. Investors will have to go against the crowd, buying the lower priced securities to achieve higher returns.”
When you found out how a specific hot stock has been mentioned in the news and everyone seems to be talking about it, the first reaction is to jump in the bandwagon first. Who doesn’t like quick money $$$?!
This chain of reaction is commonly known as “Herding” & going by history standards, this behaviour is what cause retail investors to Buy High (buy when everyone else is buying) and Sell Low (running away when its already rock bottom).
To side-step the above, Stay true to your investment plan and remember this phrase: “If it sounds too good to be true, it probably is”.
7: Investing is a Marathon, Not a 100m Dash:
It’s often too easy to fall victim to the promises of “Getting Rich Quick”.
Multi-bagger returns take time to manifest just like what Warren Buffett says before:
“You can’t produce a baby in one month by getting nine women pregnant.”
Thus, it is important to keep your expectations planted in reality and ignore the daily, weekly or even monthly forecasts of the share prices.
While stocks investing will not turn you into a millionaire overnight, it will definitely make you riches eventually if done the right way.
Conclusion
There you have it! Avoid these 7 common investing mistakes and you are probably better than 80% of the investors out there (copying the Pareto 80/20 Rule!).
