First off, have you ever made an investment mistake?
If the answer is no, then you are probably lying and to yourself.
People makes hundreds and hundreds, if not thousands of poor investment decisions every day.
Whether it is off the cuff, a moment of madness or following the crowd.
From my personal experience and stories online. Different people make all sort of errors that leads them to make a loss on investment.
These types of errors are different to one another. And based on:
- Their needs;
- Personal circumstances;
- Different personality traits;
- Following their strategy objectives.
And much more.
Below are 20 investment mistakes that are frequently made in the investment community.
Let’s get started.
Putting all your eggs in one basket is risky because it means you are damn sure the company will generate future profits. So, most people choose to spread their investment around into different companies in case one fails.
Personally, you should invest in no more than 15 to 20 stocks because no one is able to keep up with 50 or 100 stocks while juggling with a day job.
Also, make sure not to have all your net worth in stocks. Invest some of it in cash, bonds or even gold.
The Motley Fools has this great article: “What Are the Advantages of Diversification Strategies?”
Don’t do any Research
Looking through a trading update or skimming through the reported results aren’t research.
In school, if you fail to study and do your homework, you’re studying to fail. The same applies to investing.
Always do your research because you may notice something other people haven’t picked up on.
P.S. If you don’t have the time to research, then invest in a low fee index fund.
Here is a good article on: “The Importance of Stock Market Research.”
Buying High and Selling Low
You make money by buying low and selling high. You lose by doing the opposite.
Remember, equity markets look ahead of time unless something major happens that the markets have not anticipated.
Here is an expert piece on the psychology of this concept: “The psychology of buying high and selling low”
Investing isn’t about doubling your money in a day or in a week. If that were the case, we would be all rich. Wealth comes from sustainable business growth. And with it comes dividends payment and capital appreciation.
Imagine starting your career, you wouldn’t expect a pay increase every week!
Investing is the same. It takes time for sales to arrive.
Instead, you should treat your money as a separate income stream from your main source of income. Not the other way around.
Here are 8 other unrealistic expectations by Travis Bradberry in this Forbes article.
Never cutting your losses
I need to make this clearer. “Not all investments lay a golden egg.” When you make an investment, you are investing based on the information at hand. If a business deteriorates (i.e. under performing), then revisit your investment thesis.
And if there are no chance of recovery, then cut your losses and move on.
Ignoring Macro background risks
It’s not always internal problems causing a company to get bend out of shape but from external factors.
For example, any mining company has exposure to China (the biggest consumers of commodities), if it goes into recession.
We saw this slowdown in commodities demand in 2015. It caused big and small miners to collapse in value.
Another example is changing government policies such as higher taxes, more regulations and spending cuts. All this would affect companies profit expectations and so forth.
Then there are your rivals.
Trying to time the markets
Okay, this mistake doesn’t apply to individual shares/stock but focus on stock market indices. Focusing on shorting or going long on an index is super hard because you need to account for the hundreds of businesses that make up the index.
Investopedia wrote a good article on this touching subject here.
This goes well with “Not doing your research”, and explains how you get seduce by a stock falling off the cliff. It whets your appetite because you think a recovery to the shares is coming.
In some case, you can make a quick gain of 50% plus. But this present you with another problem, when will you sell or, do you hold on?
So many Decisions!
Hopefully, you would have done the research on that business and decide whether to sell or hold.
Refusing to admit your errors/mistakes
It is self-explanatory point takes into account of a person pride or loss of reputation.
To save your blushes, I abide by this mantra: “When the facts of your initial investment decision changes, you sell your holdings.”
That way you can say: “In light of recent events, I acted accordingly to the new information.” It helps you to not bring up your ego.
Listening to too many people
Having lots of opinions would fill you with indecision.
To mitigate this, listen, take notes and do your research before you act!
Trading a lot of shares
The art of buying and selling shares will incur a bunch of fees. These costs become a concern when you aren’t making larger percentage gains or have a string of loss-making results.
Read more from a bunch of advisors giving advice to avoid incurring too much fees.
Bull market fallacy
In a bull market, most people make money or see their investment account showing a hefty sum of profit. And that winning mentality goes to their head and they could do no wrong.
As the bear market gets underway, all their bravado gets swept away leaving them with losses.
The idea is to sell when historical valuations are close to all-times high. Use simple market metrics, such as price to book, price to assets or price to cash flow.
Also, if the business uses debt, then measure the valuation by calculating its enterprise value (EV). And use similar market metrics like: EV/Book, EV/Assets and EV/Cash Flow.
Expecting quick money
Investing is not about becoming a millionaire overnight. But treat it as an extra source of income (via dividends and capital gains).
This mistake is similar to number 4 on our list of “unrealistic expectations”.
Thinking investing is too easy
Most people found out the hard way by losing lots of money.
Investing is not easy unless Warren Buffett is texting you, which stocks to buy and hard.
It requires dedication like any other professionals.
The rate of success doesn’t get repeated
A very true statement.
Don’t expect two or more businesses to earn you similar returns because the expectations are different. They are in different stages in the business cycle. They operate in different industries.
But, more importantly, be prepare to accept losses on some investments.
The sale of shares after bad news
It depends on the situation of the business. If the problem is temporary, then fall in share price is minimal.
Temporary problems take time to solve, and this prolongs the recovery leading to medium-term decline in the share price. By then you would lose faith in the management and sold your shares before the recovery begins.
These things happen.
The rule of thumb I recommend is to look back at past updates from management and compare them with their statements today to suss out discrepancies.
Investment in “fashionable” assets
When talking about fashionable assets, I don’t mean gold, brand businesses like Coca-Cola or Apple and property. (Although, these assets can see serious declines)
What I am talking are popular forum stocks/shares, that people like speculating such as OTC or FTSE AIM companies.
These tend to have the following features: –
- No revenue;
- A concept;
- High risk of bankruptcy;
- Dilutive to the share price; – at each stage of the process, they require further funding.
- They get chat up as the next Microsoft, Apple and Amazon.
In my opinion, they are speculative stocks requiring extra due diligence on the management track record. Also, scrutiny of its products and services, especially comparing to what is on offer today in the market.
Following the herd
This age-old mistake gets repeated too often. It usually due to inexperience.
Rising stock prices means nothing if inflations increase is faster.
Take a country like Venezuela, that is struggling with food shortages.
Their stock market went from 12,500 to 43,000 in 15 months, which is 244% gain in 17 months.
That didn’t help investors to feel happy because inflation gained 800%.
Knowing your profits gain will buy fewer products and services is a painful experience.
The deadliest mistake: “Using too much margin”
Losing your initial investment is worse enough. But when you put 10% of your cash and borrow the rest (90% credit), this narrows the margin of error. This means a 10% adverse move against your position would wipe your equity unless you put up more money.
Well, that is all. Thanks for reading.
Call to Action
I’m sure there are hundreds of investment mistakes out in the financial world. I bet you can add some more in the comments below.
So, what is your favourite investment mistake?