18 Common Mistakes Most Investors Make
Knute Rockne, the famous Notre Dame football coach, used to say, "The way to succeed is to build up your weaknesses until they become your strengths." The reason most investors either lose money or achieve embarassing results is because they make too many mistakes. Here now is a list of mistakes made most frequently by individual investors who are not very successful:
1. Most investors are relatively poor at stock selection because they do not use good selection criteria. They do not know what to really look for to find a successful stock. Therefore, they buy laggard, "nothing-to-write-home-about" stocks that are not acting particularly well in the marketplace and are not real market leaders.
2. Investors with poor results usually buy on the way down in price; a declining stock seems to be a real bargain because it's cheaper than it was a few months earlier. This is a classic mistake. The weakness in the stock could be because the company in question is in serious trouble and may even be headed for bankruptcy.
3. An even worse habit is to average down in your buying, rather than up. If you buy a stock at $40 and then buy more at $30, and average out your cost at $35, you are following up your losses and mistakes by putting good money after bad. This is a terrible strategy and one that will, if persisted in, result in serious losses and in your being weighed down with a few big losers.
4. The public loves to buy cheap stocks, those selling at low prices per share. They incorrectly feel you can buy more shares of stock in round lots of 100 or 1,000 shares and this makes them feel better and perhaps more important. You would be better off buying 30 or 50 shares of higher priced, sounder companies. You should think in terms of the number of dollars you are investing, not the number of shares you can buy. Always purchase the best merchandise available, not the poorest.
The appeal of a $5 or $10 stock seems irresistible to many people, their hope being the stock will take off and provide huge returns. Most stocks selling for $5 or $10 are there because the companies have either been inferior in the past or have something wrong with them recently. Stocks are like anything else. You can't buy the best quality at the cheapest price. It usually costs more in commissions and markups to buy lower priced stock, and your risk is greater since cheap stocks can drop 15% to 20% faster than most higher priced issues. Professionals and institutions will not normally buy the $5 and $10 stocks, so you have a much poorer grade following and support for these low quality securities.
5. Amateur investors want to make "a killing" (a big hit) in the market. They want too much, too fast; without doing the necessary study and preparation, or acquiring the necessary methods and skills. They are looking for an easy way to make money without being willing to devote any time to really learning what they are doing.
6. Public investors love to buy on tips, rumors, and advisory service recommendations. In other words, they are willing to risk their hard earned money on what someone else says, rather than knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.
7. Investors buy second-rate stocks because of dividends or low Price/Earnings ratios. Dividends are not as important as earnings per share; in fact, the more dividends a company pays, the weaker the company might be because it may have to pay high interest rates to replenish internally needed funds that were paid out in the form of dividends. An investor can lose the amount of a dividend in one or two days' fluctuation in the price of a stock. A low P/E, of course, is probably low because the company's record is inferior.
8. People buy company names they are familiar with; names they know. Just because you used to work for General Motors doesn't necessarily make General Motors a good stock to buy. Many of the best investments will be names you won't know very well, but could and should if you would only do a little studying and research.
9. Most investors are not able to find good information and advice. Many, if they had sound advice, might not recognize or follow it. The average friend, stock broker, or advisory service could be a source of losing advice. It is always an exceedingly small minority that are successful enough in the market themselves to merit your consideration. Outstanding stock brokers or advisory services are no more frequent than outstanding doctors, lawyers, or baseball players. Only one out of nine baseball players that sign professional contracts ever make it to the big leagues.
10. Over 90% of investors are afraid to buy a stock that is beginning to go into new high ground price-wise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.
11. The majority of investors will not sell and take their losses quickly when the losses are small and reasonable. They could get out cheaply but, being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.
12. In a similar vein, investors take small, easy-to-take profits and hold their losers until they become larger losses. Investors will sell a stock with a profit before they will sell one with a loss. This tactic is exactly the opposite of correct investment procedure.
13. Individual investors worry too much about taxes and commissions. Your key objective should be to first make a net profit. Excessive worrying about taxes usually leads to making unsound investments in the hope of achieving a tax shelter. Some investors even erroneously convince themselves they can't sell because of taxes. Strong ego...weak judgment!
Commission costs of buying or selling stock (particularly if the investor is dealing with a discount broker) are a relatively minor factor compared to the most important aspects such as making the right decisions in the first place and taking action when needed. The great advantages of owning stock over real estate are the substantially lower commissions, instant marketability, and higher liquidity. This enables investors to protect themselves quickly at a low cost or take advantage of highly profitable new trends as they continually evolve.
14. Many investors overspeculate in options because they think it is a way to get rich quick. When they buy options, they incorrectly concentrate solely on shorter-term, lower priced options that involve greater volatility and risk, rather than longer-term options. The limited time period works against short term option holders. Many options speculators also write what are referred to as 'naked options', which is nothing but taking a great risk for a potentially small reward and, therefore, a relatively unsound investment procedure.
15. Amateur investors like to place price limits on their buy and sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for fractions of a point, rather than emphasizing the more important and larger overall movement. Limit orders can potentially result in an investor completely missing his mark and not getting out of stocks that should be sold to avoid substantial losses.
16. Some inevstors have trouble making decisions to buy or sell. In other words, they are indecisive, they hesitate, they vacillate, and they can't make up their mind. Investors are unsure because they really don't know what they are doing. They do not have a plan, a set of principles or rules to guide them and, therefore, are unsure of what they should be doing.
17. Many investors cannot look at stocks objectively. They are always hoping, trusting in their old favorites, and relying on their hopes and personal opinions, rather than paying attention to the opinion of the marketplace, which is almost always right.
18. Investors are frequently influenced by things that are not the most important factors, such as stock splits, increased dividends, news announcements and brokerage firm or advisory recommendations.
So, if you want to become a winning investor, then read the above items over carefully several times, and be totally honest with yourself. How many of the habits mentioned above describe your investment beliefs and practices?... As Rockne would say, "These are the weaknesses which you must systematically work on until you can change and build them up into your strong points."
Poor principles and poor methods will beget poor results. Sound principles and sound methods will produce sound results!
* * * * *
1. Most investors are relatively poor at stock selection because they do not use good selection criteria. They do not know what to really look for to find a successful stock. Therefore, they buy laggard, "nothing-to-write-home-about" stocks that are not acting particularly well in the marketplace and are not real market leaders.
2. Investors with poor results usually buy on the way down in price; a declining stock seems to be a real bargain because it's cheaper than it was a few months earlier. This is a classic mistake. The weakness in the stock could be because the company in question is in serious trouble and may even be headed for bankruptcy.
3. An even worse habit is to average down in your buying, rather than up. If you buy a stock at $40 and then buy more at $30, and average out your cost at $35, you are following up your losses and mistakes by putting good money after bad. This is a terrible strategy and one that will, if persisted in, result in serious losses and in your being weighed down with a few big losers.
4. The public loves to buy cheap stocks, those selling at low prices per share. They incorrectly feel you can buy more shares of stock in round lots of 100 or 1,000 shares and this makes them feel better and perhaps more important. You would be better off buying 30 or 50 shares of higher priced, sounder companies. You should think in terms of the number of dollars you are investing, not the number of shares you can buy. Always purchase the best merchandise available, not the poorest.
The appeal of a $5 or $10 stock seems irresistible to many people, their hope being the stock will take off and provide huge returns. Most stocks selling for $5 or $10 are there because the companies have either been inferior in the past or have something wrong with them recently. Stocks are like anything else. You can't buy the best quality at the cheapest price. It usually costs more in commissions and markups to buy lower priced stock, and your risk is greater since cheap stocks can drop 15% to 20% faster than most higher priced issues. Professionals and institutions will not normally buy the $5 and $10 stocks, so you have a much poorer grade following and support for these low quality securities.
5. Amateur investors want to make "a killing" (a big hit) in the market. They want too much, too fast; without doing the necessary study and preparation, or acquiring the necessary methods and skills. They are looking for an easy way to make money without being willing to devote any time to really learning what they are doing.
6. Public investors love to buy on tips, rumors, and advisory service recommendations. In other words, they are willing to risk their hard earned money on what someone else says, rather than knowing for sure what they are doing themselves. Most rumors are false, and even if a tip is correct, the stock ironically will, in many cases, go down in price.
7. Investors buy second-rate stocks because of dividends or low Price/Earnings ratios. Dividends are not as important as earnings per share; in fact, the more dividends a company pays, the weaker the company might be because it may have to pay high interest rates to replenish internally needed funds that were paid out in the form of dividends. An investor can lose the amount of a dividend in one or two days' fluctuation in the price of a stock. A low P/E, of course, is probably low because the company's record is inferior.
8. People buy company names they are familiar with; names they know. Just because you used to work for General Motors doesn't necessarily make General Motors a good stock to buy. Many of the best investments will be names you won't know very well, but could and should if you would only do a little studying and research.
9. Most investors are not able to find good information and advice. Many, if they had sound advice, might not recognize or follow it. The average friend, stock broker, or advisory service could be a source of losing advice. It is always an exceedingly small minority that are successful enough in the market themselves to merit your consideration. Outstanding stock brokers or advisory services are no more frequent than outstanding doctors, lawyers, or baseball players. Only one out of nine baseball players that sign professional contracts ever make it to the big leagues.
10. Over 90% of investors are afraid to buy a stock that is beginning to go into new high ground price-wise. It just seems too high to them. Personal feelings and opinions are far less accurate than markets.
11. The majority of investors will not sell and take their losses quickly when the losses are small and reasonable. They could get out cheaply but, being emotionally involved and human, they keep waiting and hoping until their loss gets much bigger and costs them dearly.
12. In a similar vein, investors take small, easy-to-take profits and hold their losers until they become larger losses. Investors will sell a stock with a profit before they will sell one with a loss. This tactic is exactly the opposite of correct investment procedure.
13. Individual investors worry too much about taxes and commissions. Your key objective should be to first make a net profit. Excessive worrying about taxes usually leads to making unsound investments in the hope of achieving a tax shelter. Some investors even erroneously convince themselves they can't sell because of taxes. Strong ego...weak judgment!
Commission costs of buying or selling stock (particularly if the investor is dealing with a discount broker) are a relatively minor factor compared to the most important aspects such as making the right decisions in the first place and taking action when needed. The great advantages of owning stock over real estate are the substantially lower commissions, instant marketability, and higher liquidity. This enables investors to protect themselves quickly at a low cost or take advantage of highly profitable new trends as they continually evolve.
14. Many investors overspeculate in options because they think it is a way to get rich quick. When they buy options, they incorrectly concentrate solely on shorter-term, lower priced options that involve greater volatility and risk, rather than longer-term options. The limited time period works against short term option holders. Many options speculators also write what are referred to as 'naked options', which is nothing but taking a great risk for a potentially small reward and, therefore, a relatively unsound investment procedure.
15. Amateur investors like to place price limits on their buy and sell orders. They rarely place market orders. This procedure is poor because the investor is quibbling for fractions of a point, rather than emphasizing the more important and larger overall movement. Limit orders can potentially result in an investor completely missing his mark and not getting out of stocks that should be sold to avoid substantial losses.
16. Some inevstors have trouble making decisions to buy or sell. In other words, they are indecisive, they hesitate, they vacillate, and they can't make up their mind. Investors are unsure because they really don't know what they are doing. They do not have a plan, a set of principles or rules to guide them and, therefore, are unsure of what they should be doing.
17. Many investors cannot look at stocks objectively. They are always hoping, trusting in their old favorites, and relying on their hopes and personal opinions, rather than paying attention to the opinion of the marketplace, which is almost always right.
18. Investors are frequently influenced by things that are not the most important factors, such as stock splits, increased dividends, news announcements and brokerage firm or advisory recommendations.
So, if you want to become a winning investor, then read the above items over carefully several times, and be totally honest with yourself. How many of the habits mentioned above describe your investment beliefs and practices?... As Rockne would say, "These are the weaknesses which you must systematically work on until you can change and build them up into your strong points."
Poor principles and poor methods will beget poor results. Sound principles and sound methods will produce sound results!
* * * * *
posted by Bob Moser at
7:43 PM
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