My Three Biggest Investing Mistakes
The more I learn about investing the more I'm able to identify my own mistakes, why I made those mistakes and how I can avoid those mistakes moving forward. Last article we took a look at the most common mistakes new investors make, click here to take a look. Whenever you try something new you're going to run into unknown situations and learn from those situations whether you made the right decision or not. Most of my mistakes are directly related to speculative investing, in an attempt to understand what it's about and how I can confidently educate and recommend investing to others.
The bottom line, is I wouldn't recommend speculative investing to anyone really. I take the approach of these articles as if I'm telling my family members how to manage their money. If you do want to and surely it can be fun, although incredibly stressful and time consuming, there are rules to be followed and you need to commit to not breaking them. Make money from something you know rather than a lucky shot in the dark.
With that being said, let's take a look at my biggest mistakes (so far) and how you can avoid them. These aren't going to be specifically bad stocks I bought, but more the psychological mistakes I made. People buy bad stocks all of the time, that's inevitable. But if you can understand why or how that happens I think it makes it easier to avoid doing so.
1. Fear of Missing Out
Fear of missing out in investing is a very real thing. If you see a stock on your watch-list move, or your stocks are declining and others are moving up, anxiety can set in. It's easy to feel like you're missing out on the market or the next big swing.
This is why having a plan, having confidence in your stocks and being patient is very important. When stocks are moving down it is a good time to consider buying them and when stocks are moving up it should be a consideration to get ready to sell. I know it seems backwards than what your intuition tells you to do. But if we assume that stocks (overtime) slowly increase, then sudden decreases must come up and steep increases must come down. Sure it's not always the case but it's irrational to think a stock will climb forever at a steep rate. In my experiences, selling a stock at a time when it's decreasing to buy a stock that's increasing rarely works. It usually only results in a very quick accumulation of missing money from your portfolio.
Buying and selling at the right time is important but again, very difficult to measure and execute efficiently. If you have a list of potential companies to buy into, have your due diligence and research already completed and never buy a company you know nothing about, owning 25,000 shares of a company you don't have a clue about doesn't payoff...
Even when you have stocks that are increasing, there will always be a stock that is moving faster than your overall performance. No matter what you do or how good you are at investing, there will always be a 'could-of should-of would-of' stock that you heard about but didn't pull the trigger on. It's important to understand that the stock market always provides new opportunities. It's impossible to know before hand whether a stock will soar or flop, so there's no use in beating yourself up over a missed opportunity. Just be prepared, do your research and identify the next one. For every one stock that goes up that you didn't buy, there'll be a dozen that go down.
2. Outside Influences
I came across the worst thing I could have possible come across almost instantly in preparing to do research for investing, online forums. Online forums in theory sound like a good idea, but if you're familiar with The Office then you understand this...
I cannot stress enough how important it is to have genuinely your own opinion before making an investment decision. I could ramble off several articles about this subject (and maybe I will) but I want to keep this simple.
You'll hear people say they make money off the stock market whether it goes up or down. If you're a value investor this makes sense because when a stock goes down, assuming it goes down below what you assess its value to be, you're getting a discounted stock that (you believe) is sure to increase.
The other option is Short Selling. Short selling stock is a complicated concept, simply put it is: when someone borrows shares from a broker then immediately sells the shares with the intention to buy them later on and return them to the broker. Short selling only works if you think the stock is overpriced and going to decrease in price and if done successfully you keep the difference.
Let's look at an example.
Let's say I borrow 1,000 shares of company ABC at a price of $10 a share from a broker. I believe the price is going to decrease and I've assessed the company to be worth about $5 a share. I've successfully borrowed and sold my 1,000 shares for $10,000 and within an amount of time the shares begin to decline down to $5 a share. I am happy with this price so I buy back the 1,000 shares for $5 a share for a total of $5,000. I return the 1,000 to the broker and my profit is the difference ($10,000 - $5,000 = $5,000). There will be some transaction fees and interest for borrow the shares but that isn't too relevant to the point.
For a real life example of short selling, I would recommend checking out the Netflix documentary Dirty Money and watch the third episode titled 'Drug Short', it features Valeant Pharmaceuticals and and their story of being 'worth' about $335 per share to less than $12 per share in less than two years, over a 96% loss on one of the hottest and most talked about stocks during that period.
So why is this all relevant? This is an important consideration because you'll always find places where people are saying either to buy or sell stocks. Remember, the stock market is a supply and demand market place. If lots of people are trying to buy the price should increase, if lots of people are trying to sell the price should decrease.
People could say to buy a stock. There are a few possibilities: the stock is really good and they want everyone to become rich (unlikely...), they currently have shares and want to sell at a higher price (pump and dump), they want to short sell the stock and the higher it goes the higher margin for profit they could potentially have.
People could say to sell a stock. There again are a few possibilities: the stock is really bad and they don't want anyone to lose money (again, unlikely...), they believe the stock is good and want to buy it at a lower price, they are short selling the stock and want the price to drop as low as possible.
If you're listening to outside sources to what you should do with your investments, you're playing into whatever game they are playing. There's absolutely no way to know what intention they have with the stock, or even whether they have shares at all. In all likelihood, if they are saying to buy shares you could very well be buying the exact shares they are trying to get rid of.
3. Being Irrational
Knowing your plan and your goals in very important to make sure that you take your gains when they come and don't become too greedy that you actually miss out on your profits.
When stocks are moving up in value it is hard to look at it and say 'this ride will come to and end, I'm just going to sell now and take my profit'. But logically of course prices won't increase forever. What I have found is I have made this mistake over and over again. The same patterns emerge with different stocks all of the time. Don't get in the mindset of 'this time it's different' or 'that won't happen to me' because it can and it will. The stock market is a tool to make money, but it isn't necessarily there for YOU to make money. If you've made profits in speculative stocks, take them, get out, thank your lucky stars and put your money in index funds. Always remember what your goals are and how to execute them most effectively. It's much easier to lose money quickly then it is to make money quickly.
These I think are my biggest mistakes that I've made with speculative investing. I have made a lot of mistakes that is for certain, but it's something I enjoy doing and learning about. I wouldn't recommend speculative investing, but if you feel it's something you want to give a go at, I'd suggest keeping these things in mind and remember to only use a small amount of your overall portfolio. Don't lose it all on one stock.
After writing out what I believe are my biggest mistakes with speculative investing, I think it all can come down to a lack of organization and commitment to my plan. Before investing in the stock market I truly believe it's important to have a plan and set objectives.
I set up what I call my Investors Board. My Investors Board is a dry-erase board that contains my goal, a set of my own rules I came up with after experiencing investing and researching what others recommended and a watch-list of stocks to keep my eyes on. I know all of these things can be done probably much simpler electronically, but there's something about writing things out myself that I like. No matter your approach or preferred style of organization, it doesn't guarantee success, but I think understanding your plan and having a set of rules for yourself is very important. We'll take a look at my ten rules that I use for investing in the next article and why I think the rules are applicable.
If you have any comments or questions please feel free to leave a comment or send me an email. More importantly though, if you have any advice or experiences you'd like to pass onto investors let me know, I'd be happy to get investors involved to be able to provide the readers with the best and most relevant information.