The following is a guest post by Tony at Investorz Blog.
Effective and profitable investing is made up of 3 basic components.
- A stock selection process that is time proven and works for you
- Risk management
- The discipline to stick to the first 2 components
Lacking anyone of these components means that you won’t last long in the stock markets.
Below are 14 common mistakes that successful investors and traders don’t make.
- Most investors don’t last more than 3 years because they buy story stocks that sound good on paper, but in reality are neither the market leaders nor gaining market share fast. In other words, if you don’t have a decent stock selection criteria, God help you. There is no such thing as easy money.
- Buying a stock on the way down is a big no-no. It may seem like a bargain buy because it is cheaper than a few months before. Take the financial crash in 2008 for example. If you had bought in September, it would have taken more than a year to recoup the entire investment loss. I always buy on the way up, when it’s clear (by using technical analysis) that the stock still has room to fly upwards.
- Buying on the downtick is a classic amateur move. If you buy the stock at $20, and then more when it’s at $15 and averaged your buying at $17.5, you’ve just thrown good money after bad. It’s classic for amateur investors to buy more when believing that they’re getting a bargain when in reality, it’s just throwing good money after bad. Doing so ends up weighing your portfolio down with some sizeable losses.
- The public just can’t seem to lose the attraction for cheap stocks, possibly because of the notion that stocks worth $2, $5, or $10 per share can easily double in price. Truth is, you can’t buy the best quality at the cheapest price! There are often reasons why these stocks are priced so low, such as poor earnings or lagging behind in the marketplace. Also, buying low priced stocks will cost you a ton in commissions. Many online brokers work on a price per share sold/bought basis.
- There is no such thing as easy money in the financial markets. Sure you can get lucky and catch a market bubble, but if you don’t learn anything, you’re screwed in the long run. I spent 8 months analyzing past charts and learning about investing before actually investing in my first stock.
- The public loves the notion that there is easy money in the stock markets, hence, are willing to listen to any tip or rumour that sounds profitable. Tips don’t work, and neither do rumours because 99% of the time the tip or rumour comes from an unknowledgeable or questionable source.
- Many people buy certain stocks just for the dividends paid out by the company. Don’t make this sucker move! Buy a stock because it’s prospects are good, not because the dividend looks nice! The max a stock will yield is maybe 8% a year, while most stocks fluctuate 20% a year. Dividends are unreliable because they’re the first “expense” that companies cut when the economy turns south.
- The majority of investors get caught up by all the noise and lose the ability to think clearl
- Most investors have an emotional attachment to certain stocks. “I worked for this company, there’s no way I’d abandon this investment!” If you refuse to lose your emotions, then accept that fact that you will lose money. Successful investing requires unbiased, unemotional analysis.
- Investors tend to sell on small profits and hold onto losing stocks. This is because humans hate being proved wrong, and think “There’s no way I’m wrong! This is just a temporary downturn!” Keep a stop loss order to avoid being too attached to your losses.
- Investors love to trade stocks when all they have is a few hours each week to analyze the markets. Don’t! The temporary market volatility seduces most part time investors into trading the waves. All that will result out of this is loss of money. Leave the trading to the full time traders.
- Lack of focus. You never see a successful portfolio with 10-30 stocks in it. Success depends on focus. Only through focus can you channel all your time towards deeply analyzing one stock properly. It’s like multitasking. Do you produce better results when multitasking, or when focusing on one thing.
- Inexperienced investors believe they can short stocks. They shouldn’t. Shorts require immaculate timing, and only market experience can tell you when the time is perfectly right to buy or sell.
- Investors are too focused with minor things. You only have so much time in a day, so avoid focusing on press releases, rumours, brokerage analysis, etc.