Common Investment Mistakes

Let me start off with stating a fact. The stock market (and all markets for that matter) were, are, and always will be a zero sum game. This means that for every dollar made in the stock market, someone else loses a dollar. So what does this mean for you? It means that your enemies in the market are trying to steal money away from you. Only by learning what not to do will you know what to do will you know what to do. So here are 7 common investment mistakes that a lot of investors make.

  1. Believing and looking for tips.
  2. Using leverage.
  3. Diversification.
  4. Buying into a bubble near the top, knowing it’s a bubble, and hoping to make some money before the bubble pops.
  5. Buying individual stocks.
  6. Buying penny stocks.
  7. Shorting the markets.

#1 – Believing and Looking for Tips.

Ever been online and seen those ads that say “sign up for our stock tip newsletter and find out about stocks that will make you rich Rich RICH”? Have you ever asked your friends or colleagues “what stock should I invest in”?

Let me give you an eye opener; never ask a question like that again. Ever. By asking for a tip, it just proves your ignorance. Ignorance in the stock market simply means that you WILL lose money.

If you buy a stock that your friend recommended, you might make some money. But I 100% guarantee you that if you keep asking for tips and acting on them, in the long run you’ll be sent to the poorhouse. Chances are, the person giving you a tip is just as clueless as you are about which markets/stocks to invest in. There is no such thing as easy money. Asking and believing in tips is like asking for easy money. In the grand scheme of things, there is no such thing as easy money. Only easy pain. Here’s why tips don’t work.

Did the tip giver tell you at what price to buy? Did the tip giver tell you at what price to sell? Under what circumstances to sell? How long to hold onto the stock? No. Since all you asked for was a tip, all you’re going to get is a tip. You’re not going to get a detailed analysis of the company. Hence, you won’t know what price to buy or sell at. Timing is crucial for all investments. You won’t know how long to hold onto your position. Always do the thinking and research yourself. Are you going to spend less time thinking about how to bet your life savings than you do buying a TV? I hope not.

#1 – Using Leverage.

In the history of the investment markets, many great investors and funds have been killed by leverage. LTCM, Michael Steindhardt, Tiger Fund. They all had geniuses at the controls. They all racked up spectacular returns. And then, they all imploded because of leverage.

Debt is, and has always been, a dangerous thing. Using leverage for investments has 3 side effects; 2 of which are bad. Leverage multiples risk, reward, and dependence on timing. We understand the part about multiplying reward and risk. Now the not so well understood part is dependence on timing. If you’re using leverage, then your timing must be perfect. For example, you bought Company A stock (below chart) with a 4-1 leverage portfolio.

As you can see, your timing was off, and you lost everything you invested in that stock. Over the long run you were correct (as the trend was UP), but you used leverage, so you went bankrupt. Getting your timing right every single time is impossible. Don’t use leverage.

 

#3 – Diversification.

Diversification is the enemy of performance. Instead of spending time monitoring multiple markets, you should spend ALL your time monitoring just one or two markets. Become an expert at those one or two markets, instead of knowing just a little bit about ten different markets. Only by becoming very familiar and experienced with a market can you make money off that market.

#4 – Buying into a Bubble.

Near the end of any bubble, most of the sophisticated investors know that the markets are in the final stages of a bubble. So why do they still buy into the market at this stage? Because the final stage of a bubble is the most profitable time to invest in, and also the most dangerous time. No one knows how much higher the markets can go. No one knows how much time is left until the bubble is popped. At the final stages of a bubble the markets become totally irrational and dangerous.

#5 – Buying Individual Stocks.

Unless you have crazy connections with executives at public companies, you shouldn’t invest in individual stocks. When investing in individual companies, you need to get really up close to observe the company. Just by reading the company’s financial statement and paying attention to press releases won’t do you any good. That’s common knowledge, and has already been discounted by the markets. You need to understand the company’s competitiveness, ability to increase revenue, where it plans on expanding, etc. Only management knows this sort of stuff (or at least knows the truth about this stuff), hence you shouldn’t invest in individual stocks unless you have big connections with management.

#6 – Buying Penny Stocks.

Shortest piece of advice you’ll get today: don’t buy penny stocks. 99.9% of them end up sucking.

#7 – Don’t Short the Market.

I know this sounds stupid, but shorts are very dangerous. You may profit from a lot of short positions, but one mistake on the short side can be fatal. This is because you have theoretically unlimited potential losses in short positions. The key to shorting a market lies all in timing. Go to Google Finance and take a look at the .DJI index for the 2008-2009 period.

If you became bearish in mid-2008, then you were absolutely correct. The overall trend was DOWN. But along the way, there were a lot of major up swings. Get caught by any one of those big up swings (if you’re on the short side), and you just got yourself a fast ticket to the poorhouse. Timing is everything.

One thought on “Common Investment Mistakes”

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