Let’s face it, we aren’t perfect. Human beings are prone to making mistakes, especially when investing.
Investors have made and are still making all kinds of mistakes. Whether they might have missed out on buying that wonderful stock, shorted another at a loss or followed the herd and made a bad investment. In cases like these, the best option is to learn from your, and others, past mistakes.
Never beat yourself up about a bad decision. Everyone makes one at some stage. If you ever feel bad about making an investing mistake, remind yourself that no person can fully understand the stock market. Not even the investing gurus. Some of the best investors of our time have made huge investing mistakes, costing them millions of dollars.
Investing approaches differ widely. What one investor thinks is the correct approach might not suit another. We might have our differences, but we can all agree that the following five common investing mistakes should be avoided no matter which approach you are following.
1. Not having an entry and exit plan
The first thing you should do is to determine your entry and exit strategy. The internet is flooded with investment advice of hot stocks to add to your portfolio. Block out these speculations by having a set entry and exit strategy.
For your entry point:
- Buy stocks in industries and businesses that you understand.
- Base buying-decisions strictly on financial fact, not on analyst opinion or investment advice from Tom, Dick and Harry.
- Your entry decision should revolve around valuation, because the price you pay makes the difference between a good and bad decision. Never pay more for a stock than what it’s worth.
For your exit plan:
- Before buying a stock you should identify a number.
- When you reach that number you should sell.
- Don’t just make an educated guess, base the number on a growth percentage.
2. Investing according to your emotion
Usually our investment mistakes are a direct result from emotional decision-making. Switch off your emotions and think like a computer. I know it isn’t easy, but remember your thoughts should be focused on the data that you see in front of you. Buy, sell or hold only when the financial data suggests so, not because you feel it might be a good decision.
3. Personalising investment outcomes
No matter what the outcome, whether great or bad, you should never personalise the results of your investments.
Being over-confident can harm your portfolio, because you make reckless decisions. Being too scared to invest after licking your wounds won’t bring you anywhere either. Learn from your mistakes and if you do become successful from doing so, you shouldn’t let it get to your head. Stay objective at all times.
To avoid personalising success, remind yourself of the following:
- Your past performance doesn’t guarantee your future performance. It’s the stock market, anything can happen.
- Take notice of how the gurus keep a humble attitude no matter how much success they have attained in the past.
- Make decisions based solely on facts.
To avoid personalising losses, do the following:
- See it as a minor bump in your very long investing journey. Mistakes are the portals of discovery.
- Remind yourself of Thomas A. Edison’s quote: "I have not failed. I’ve just found 10,000 ways that won’t work."
- Learn from your mistakes so that you won’t ever repeat them.
4. Not reviewing your portfolio
There is a difference between checking your portfolio and reviewing it. By reviewing I mean more than just browsing through your portfolio to see what’s gone up and what’s come down. I mean really taking the time to re-evaluate your stocks by doing the following:
- Go through the valuations of each business to determine whether it’s still a hold, sell or a buy.
- Don’t review you portfolio too often. Reviewing on a daily or weekly basis will only lead to emotional decision-making, which you want to avoid.
- Ask yourself whether you will buy more of the stock if it fell another 50% in share price.
- Go over your valuation inputs you used to purchase the stock and see if it still makes sense to you.
5. Placing more emphasis on being right than making money
Investing has two rules. Rule number one: never lose money. Rule number two: don’t forget rule number one. According to Warren Buffett those are the only two rules you need to worry about. I have to agree with him.
Being “right” in the investment world is only seen as a moral victory unless you are capitalising on it. Moral awards don’t count for much in the investment world. You can’t grow your portfolio from moral victories, but you can with well-deserved earnings.
When you feel that you are right about a certain stock and you have the data to support your assumptions, then go ahead with your decision. Soon enough you will learn whether you made a mistake and learn from it or alternatively you will be achieving market-beating returns. Let's hope for the alternative option.
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