Learn How to Avoid Losing Money from the Common Investor’s Mistakes
The stock market attract people from any social class and income brackets because is the pillar of wealth creation on the planet.
People overlook the fact that the market stock is a place where companies are traded, bought and sold several time per day by shares. Basically, when you invest in market stock, you are buying a company.
A company is selling products for a profit and over a period of time most company grow and make more profit increasing the value of their shares, making you as an investor wealthier. But the most common image portrait of the stock market is like a casino, where people gamble instead of investing.
I have invested in market stock for years, and my niche is Asian emerging markets (very exciting but very risky investments) because I have worked and lived in those countries for years giving me a better understanding of companies, products and consumers.
When in vesting in companies, it is important to understand their markets. If you are a first time investor, I suggest you to use this simple strategy yet effective. Do you have a favorite brand? A service that you and your family is using for years? Look at the company behind these products and services, it is a good start for your investments.
In these years I’ve both made and lost small fortunes. Fortunately, I’ve made more than lost and I can tell about my experiences Throughout my investing years, however, I’ve witnessed some horror stories – people who never recovered from some of their illogical investing.
So, before you take your hard earn money and jump into the market stock, I want to share with you the 7 most common deadly sins of investing I’ve seen people lose money investing in stocks.
7 Common Reasons Investors Lose Money in The Market Stock
I’m been there, I know how feel to see the hard earn money disappearing from your trading account. It is painful, and you feel that you can’t do anything about it. Not really.
Financial education is the first step to avoid losing money on the market stock. Learning from the mistakes of other investors is a painless lesson for you, but learning from your own mistakes will be costly and stressful.
This is the reason I’ve created this blog so you can learn from the mistakes of others (in this case my mistakes) and get all the benefits and rewards of successful investing.
Didn’t Invest in Personal Knowledge
This is the reason you are reading this article and you are learning from me. You know that you need first invest in your personal knowledge before investing in the stock market.
It puzzle me how many people jump into the stock market without any basic knowledge.
Just imagine to buy a Ferrari for your son which got the driving licences last month. What are the changes your son would crash? So, why crash your hard earning saving on the market stock?
Get knowledgeable first.
Trading Instead of Investing
It is tempting to trade. You might think that you can make fast and easy money, isn’t it? I buy at US$1 and sell minutes later at US$1.02 making a 2% profit. Easy.
What about if in minutes the stock goes to US$0.95?
Inexperience investors never think about the the dark side of the coin, and they loose money.
You need to learn how to create different scenarios for your investments, identify possible risks before they occur so you can handle any risk situation in swift manner. This is called risk management.
Warren Buffett, the second richest man on the planet is terrible at trading and timing market events, so what makes you think you can?
Unfortunately, a very large study of day trader performance showed that more than 90% of day traders lose money in the long run. The study was published in 2010 of hundreds of thousands of day traders from 1992 to 2006:Click Here To read The Study.
Trading is a hard game, requiring 70+ hours per week and sophisticated software to operate, still producing underwhelming results.
My advise, don’t try to time the market moves in order to make a quick dollar, no matter how tempting it may be.
Buy at The Stock/Market Pick
How often you heard TV and newspaper calling for “It is never been the best time to invest, stock at all time high with a growth of 50% in the last three years”.
This is the classic breaking news, that make noise and influence people to do irrational thinks; jump into the market stock, actually jump into “any” stock pick and market stock.
Usually great news about the stock market are during bubbles, and very bad news during the bottom. Inexperienced investor jump in during the bubbles and sell during the bottoms resulting in massive losses.
Quote of the day:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”
Stock tips are just ideas. In other words, stock tips aren’t worth shit. Only your due diligence and fundamental/rational analysis of a company will bring to your attention great stocks to pick.
Another danger is to invest in market picks, because as it goes up, it will come down. And when the market as a whole come down, even good companies share’s price will follow suit.
This is an example of market picks for the Dow Jones in the last 3 years. If you would have invest money at the pick, in average take between 4 months up to one year to recover the money in a bull market. I mention bull market because in the graph above we are in a bull market. In case of a bear market, can take between 3 to 5 years just to recover your investment and start to turn a profit.
Market heights are developed by an influx of money into the market stock following positive sentiments by investors. It is demand/supply, the more stocks investors demand, the more the price go up.
Here is the problem with picks, they go for a correction (investors pull out their money), and if you stay invested, you are going to lose money and the time to just recover the investment is between 3 months up to 5 years depending on circumstances. This is the best way to lose money.
It is hard to predict if the market has picked, but take advantage of bottom market is much easier and profitable.
You will notice in my future articles, that I focus my investment strategy on the bottoms of the market. I have got great result buying in during the bottoms, holding and selling at higher value. I have developed a strategy that allow me to profit constantly with very low risk involved. Of course, there is always a risk, but a good investor will always minimize risks.
Pumped Stocks
Certain stocks, tend to get over hyped and overbought, just because the media is singing its praises and the brokers flooding investor email box with positive analytic charts.
I don’t mean all the stocks that get attention from the media are a bad investment, some aren’t. If you’re considering buying a heavily marketed stock, don’t be lazy, take one hour of your time to run a comparable analysis. This will save you from costly mistakes.
Simply, checkout their products and selling proposition, comparable study of industry peers’ price to earnings, sales and cash flow ratios, dividend discount, and debt to revenue. understand why this company in the near future is going to make more profit.
Would you buy a house without checking the neighbor hood prices? Same goes for stocks.
In my years of investing, I notice a handful of companies shifting from average performing company to superstars during economic super cycles or national new policy. Buying these companies stocks can be very profitable, but doesn’t happen often.
A simple example; if the government will offer a tax rebate to buy a new vehicles, this shift of policy will benefit car makers in the short term. So, buy stock of your favorite car maker is a no-brainer.
The recent collapse of oil, it is a economic super cycle event, and some companies are going to profit from it.
I bought one of the biggest asphalt companies in South East Asia because is benefiting from the collapse of oil price, the company have little competitors, and it is going to benefit from government spending in mega infrastructure.
For years this company profits were stagnant, but because circumstances and economic factors have shifted, this company is going to get a bust of earnings.
Invest More Than You Could Lose
Investing can trigger lot of emotions, I’ve seen people do some crazy things in the stock market, and just because they couldn’t take the short losses on the wave of the stock.
I know a smart guy that invested all his saving on the stock market after carefully picked the companies. In fact, the companies were fundamentally strong, unfortunately some bad news sent the general market into a two weeks dive (this is common in the market stock, nothing to be worry about).
He was stressed to the max every day watching his investment decreasing daily. He literally lost sleep over this investment because all his hard saving built in years were getting wipe out in days. Once he hit his breaking point (ten days) and could no longer handle the stress from his perceive risk, and sold out his positions.
He booked in a lost of 9%, but he could sleep again. However, he left on the table a 23% surge in the next year, just because he invested more than he could lose.
Investing more than you can afford to lose evokes all types of emotional decisions drive by fear. Fear is your worst enemy. With this simple step and others, you can reduce your fears to a manageable level helping you to avoid catastrophic investment decisions.
Catching a Following Knife
This one is where I’m been well experience in losing money, but I’ve have learnt my lesson in the hard way.
“Wow, this oil company lost 4/5 of its peak value, it is a bargain” Does it sound familiar?
I recently lost 20% buying into a oil company while the stock price was getting hammered thinking that eventually it would turn around soon. Result? After 2 months I sold at a lost of 20%.
I have got into the investment too early, fortunately I realized that and stop my lost at 20%. While writing this article, that stock has lost another 30% from the date I sold. I haven’t lost interest in the oil stocks, I’m waiting for the bottom because it will be the right time to invest in the market stock for the long term, it might take more than 4 years to start to see a climb. But keep in mind, when investing time is on your side, so if you can wait for few years, you better invest your money somewhere else. .
In market stock and currency, falling angels are better be left alone till they reach bottom and the price consolidate for at least 2 months.
Now a days I’m more patient and let the markets settle even if it means I’m giving up some of the upside by not “bottom fishing”.
At the moment it might be a great opportunity to buy oil and coal mining stocks by a price point of view because the stock’s price is never been cheaper in the last 10 years. But price isn’t everything, what about the industry they are in and the company fundamentals.
Before buying into the oil industry, consider that 10 years ago there wasn’t electric cars could drive for 300 miles without refuel and have performance like a Ferrari. This could be a breakthrough innovation going to change the car industry and indirectly affecting the oil demand. Plus, the fracking revolution is flooding the world with cheap oil.
The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don’t confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.
Lost Opportunity
Most investors are hesitant to buy stocks just because they have rallied 10%-20% sometimes even in a day. I’ve made good money in the markets buying stocks when there was a fundamental improvement in the investment story even if the stock had already rallied significantly based on the positive story.
This is a lost opportunity. Practically, you will not lose money as you never bought the stock but you will miss out on future gains.
Over ten years ago Berkshire Hathaway’s share price went from $6,000 to $10,000 in a year. Many investors waited for the stock to go down to its lower initial position, unfortunately they missed out on the subsequent rise to $70,000 per share over the following six years.
What’s behind the stock price rise? It’s the company! Good company with solid earning can weather any market storm.
I’m not saying that stocks never undergo a correction. The point is stock prices reflect the company performance and usually the price readjust from overvalued or undervalued prices during earning season.
If you find a great firm selling products in demand with good profit margins, there is no reason the stock won’t keep on going up.
Conclusion
In conclusion, every time I have lost money in the stock market is when I did one or more of the seven investing sins above. Losses in the stock market are unavoidable. They happen. But they don’t have to be a common occurrence if you know what to watch out for. And starting learning from the common investing mistakes, will put you in the right direction.
If you feel unsecured and not able to avoid the mistake above, I recommend index investing for you.
Index investing is a way to diversify your investing and not worry about the ups and downs of the market because you put money into the stock regularly over a long period of time.
I would love to hear your thoughts, please write them below and let’s discuss.
