While in a hard to believe, even the great Warren Buffett has made one or two mistakes during the 40+ years that he’s been investing. The reason we bring this up is that, for most of us mere mortals, mistakes are certainly a part of the game. The real trick however is to recognize your mistakes and, hopefully, learn from them. To that end we put together a list of some of the most common investing mistakes so that, rather than having to make them yourself, you can read about them here and avoid them completely. Enjoy.
- Relying too much on Margin. While it’s known in investment circles as ‘free money’, the fact is that margin, or borrowing money to leverage your investments, can sometimes be exactly the opposite. If your margined investments start to lose and you used too much borrowed money to buy them, the losses that you have will be greatly compounded. The fact is, you’re going to eventually have to pay that money back and, if you weren’t wise when using the margin, the financial pain that you’re going to feel may be great. The lesson here is simply this; use margined sparingly or, if you can, not at all. Better to wait until you have a lot more experience before using this high risk investment strategy.
- Using ‘tips’ to buy stocks. This one’s relatively easy to explain. If it’s been used to get a laugh on a television sitcom, Jerry Seinfeld has used it in one of his routines or your neighbor Bob has told you that he’s positive that this is going to be this stock tip that ‘sets you up for life’, following it will probably means that there is a cream pie to the face in your future. To be perfectly frank, taking a tip in and of itself isn’t a big mistake but not following up on your tip and researching it thoroughly, as well as considering the source, is just plain dumb, financially speaking. The lesson here is that you should always thoroughly research and do your due diligence on any tips that you might get, no matter the source.
- Thinking that you can become a day trader overnight. For the inexperienced investor day trading should definitely be avoided. Yes we’ve heard about investors who spend all day buying and selling stocks from their computer and we’ve also heard about how they make thousands on one trade while sitting in their jammies sipping their coffee. The fact is however that, for those that actually can and have done this, they have also put in a heck of a lot of time and energy to get where they are and, in most cases, have also lost more than their fair share of times. The average day trader is a person who has years of training, lots of patience and an inordinate amount of discretionary capital to work with. The lesson here is that, unless you’re going to make it your actual career, day trading should never be looked at as a hobby (unless you have all sorts of money to burn).
- Many people who have had early success in the stock market tend to overestimate their abilities. This can be a huge mistake and, for every new investor who gets swept up in the euphoria of their success, there’s 10 others who have been met with massive failure and the loss of substantial amounts of money because they overestimated just how good they actually are. The lesson here is simply that, even if you have one or two early successes, you still need to take things slowly, put in time for research and strategy and constantly ask yourself ‘can I do better?”. If you really want to be successful as an investor in the stock market, patience is definitely your ally as well as a smidge of humility.
- Taking your eye off of the ‘big picture’. While familiarizing yourself with investing terms, techniques and other technical jargon is all good and well, most new investors forget to look at one of the most important things about investing; trends. In fact, most professional investors have a saying that goes “the trend is your friend”. The fact is that it’s easy to get caught up in the details of investing and not see the forest for the trees. The lesson here is that, while knowing about techniques and strategies is an excellent idea, knowing how to look at the big picture, break it down and see exactly what’s going on at any given time is much more important.
- Adding to your losses because you’re too proud to let go. Professional investor William O’Neil will tell you that, once a stock that you own reaches 7% lower than the cost that you purchased it, it’s time to sell it off. No matter what. The mistake that many investors make is that they are too proud to admit that their pick was a bad one and hold on to the stock much longer than they should. The lesson to be learned here is that self-discipline and having a plan are both necessary when you are in the stock market and any pride or emotions that you have should definitely be checked at the door.
- Getting duped by ‘bargain’ stocks. Here’s a tip; most stocks that are low are that way because something happened that put them there. It’s extremely rare to find a stock that’s mispriced and, even if everything does check out, in many cases even the best laid plans can go bad when it comes to stocks that you bought at a value that you perceived was ‘excellent’. The lesson here is that price alone should never be the determining factor in your decision to buy a stock and that you’d be far better served to always do your homework and your due diligence before purchasing a stock, no matter how good the price looks.
We hope that the mistakes that we’ve shown you today will help you to avoid making them yourself in the future. Investing, like anything else that’s worth doing, is worth doing not only was the Susumu be out in modern web my élan. If you educate yourself, take advice from professionals and don’t let your emotions get in the way, avoiding the mistakes above is definitely possible. If you have any questions about investing or need advice about your finances, please let us know and will get back to you with options and answers as soon as we can.