When it comes to investing, everyone makes mistakes. No one is perfect or immune from collecting their share of “Investment Learning Experiences.” And it seems that investors in the stock market are more prone to them than most. Therefore, a key to success when investing in the stock market is to not make the same regrettable move twice. The best investors acknowledge the educational value of a temporary setback and do their best to avoid The 8 Most Common Stock Investing Mistakes.
1) Buying stocks on hot tips, rumours, stories, chat room talk or advisory service recommendations. Even if they happen to be true (and my experience is that they are usually not) by the time you get the information the big money’s already been made.
2) Picking stocks for dividends or because they have low price-earning ratios. You can easily lose the amount of a dividend in one or two days’ fluctuation in stock price. And a low P/E is often low because the company’s record is inferior.
3) Buying cheaper stocks in order to acquire more shares. Cheap stocks are usually cheap for a reason. They are not very valuable, often because they lack the support of institutional sponsorship. Thus making your risk greater, since cheap stocks can easily drop 15% to 20% in value in a very short time. Whereas higher-priced, quality stocks (especially with institutional sponsorship) “gap down” much less often.
4) Worrying too much about commissions and taxes. Although you certainly want to do what you can to reduce your cost of investing (commissions and taxes) you need to always keep in mind that your key objective is a net profit. Too many times I have seen traders buy and sell so often that the commissions and taxes eat up all their profits (and then some). Keep focused on the bottom line and the rest will take care of itself.
5) Over 98% of the masses won’t buy a stock that is hitting a new price high. That’s right, according to research done by Investor’s Business Daily over 98% of the masses won’t buy a stock that has hit a new price high. To me this is amazing. Think about it, the logic dictates that any stock that doubles or triples in price must go through a succession of new heights (new all-time highs) along the way. A new high is rarely too high when looking for great companies. Yet, most people will never buy a stock that is in new (high) territory because they have the false belief that if it is at an all-time high it must be too expensive. Because of this they miss out on the best stocks available. Some companies like Intel have continually set one new high after another for years on end.
6) Unskilled investors stubbornly hold on to losing stocks to “get their money back” while selling growth stocks quickly for small profits. This is “Letting Your Losers Ride and Cutting Your Profits.” This is the exact opposite of what you should do. To make the most of your best moves, you should “Let Your Winners Ride and Cut Your Losses.”
7) Buying on the way down in price. A declining stock looks like a bargain. But it is usually not. In most cases there is a good reason why the price of the stock is headed south. And there is no golden rule that says it has to recover (ever).
8) Wanting too much, too fast, without doing your homework or learning essential skills. So many people live with the delusion that they can make money actively investing without any need for research or learning the essential skills (both technical and psychological) required for investing. This is the mindset of the Level Three Investors of the world. The Level Five Investor realises that they must gain the knowledge and expertise required to invest successfully.