When I first started investing, I made a lot of mistakes. Most everyone does; it’s part of the learning curve. I bought when I should have done nothing, and I sold when I should have held or bought more. Of course, investing style/strategy plays a large part in what you should or should not do… however, that does not mean you won’t make mistakes. Even the great Warren Buffett has admitted that the very company he owns, Berkshire Hathaway, was actually one of his worst investments when he started out.
Here are, in my opinion, the 3 biggest new investor mistakes:
#3 – Letting emotions dictate your trade
I hear it time and time again: “I won’t buy that company, they don’t care about their customers…” and then they site reasons as being personal. Reasons like, ” they were so rude to me on the phone.” Or, “they increased the cost of my toilet paper 50 cents..” Or any number of reasons that do not come from a business perspective, but a personal experience prospective.
Look, I get it! Businesses piss you off from time to time. But always remember, for every negative thought on a company, there might be a million positive thoughts on that company. If the business fundamentals are solid, it might still be a good investment decision.
Does this mean that your negative view on the company means nothing? Absolutely not. And there are times where this can be beneficial in deciding to buy, or not to buy a company’s shares. But choose wisely.
Look at it this way: maybe get back at them by taking some of their profits… because in reality, that’s the only reason people invest – to take a share of the company’s profits. When I make investment decisions, I am looking out for me and me only. It is my money that’s on the line, not that company’s or anyone else’s… mine! So I invest in the company’s that I feel can give me something in return.
#2 – Buying and selling at the wrong time
Buy high, sell low… ummm, I mean buy low, sell high. I see it. Trust me, I see it. Heck, I’ve done it. I have bought into a company when I should have done nothing, and I have sold out of positions too early. Things like greed, emotions, and knee-jerk reactions cause us to do many things we shouldn’t do in the markets.
A stock is shooting up, I mean sky rocketing! It has risen 10% in the last two days. Is this a good time to buy? I don’t know… is it a fundamentally well ran company? Have you read their financial statements, proxy’s and press releases? Do you know the direction the company is heading in the future? Do you feel confident enough to purchase shares at this new high price?
If the answer to any of those is NO, then DO NOT BUY THE SHARES!! Research is so important, and the vast majority of new investors totally ignore it. Take your time, do your research – the company is not going anywhere if it is a good company.
Let’s flip this coin. A company you own shares in is dropping like a rock; it has fallen 10% in two days. Should you sell? I don’t know. Again, have you read their financial statements, proxy’s and press releases? Do you know the direction the company is heading in the future? Do you feel confident enough to sell your shares for a loss, or smaller gain than you expected at this new low price? … See a common theme here?
Research, research, RESEARCH! A 10% drop in 2 days is terrible. No doubt! And it is hard to keep emotions in check when this happens. But, if the company is solid and you are confident they are solid, then in fact, this might be a good buying opportunity. Or at the very least, a time to simply hold what you own and wait for the tidal wave of sellers to subside.
#1 – Taking advice from your neighbor
Neighbor: Hey, buddy! I got a GREAT investment idea for you.
You: Really? What?
Neighbor: You REALLLY need to buy that new company that just went public. They are fantastic!
You: Really? Why?
Neighbor: Because they are awesome! I love their new product.
You: Awesome! I will do that.
Ok… WAIT! Don’t get carried away here. You have nothing to validate your decision, except for your neighbor who’s only validation was their love for one of the company’s products. Does this mean their financials are solid? Maybe. But did you find out for yourself by researching them? Nope!
What if this company, three months from now, files bankruptcy? I’ll tell you… you lose all your money. However, had you took your neighbor’s advice as just a starting point, you could have looked into the company’s financial statements and possibly spotted weakness in them. Weakness in financial statements is a big red flag to any potential investor.
Listening to neighbors, analysts, the news, etc., can be beneficial. It can give you ideas, and at least, possibly, guide you in the right direction. But never take their word as fact, until you do your own due diligence and look into that company.
Research is the most important part of investing. You have to make decisions based on rationale and your own opinions. Leave emotions at the door, leave poor decision making at the door, and never take someone else’s word on something to heart. Theses three things can be a recipe for disaster in terms of your success as an investor.