You don’t need to be a rocket scientist to make money in the stock market. Investing is not a game where the guy with the 160 IQ beats the guy with 130 IQ. Subject to experience, everyone’s on an equal footing. Unfortunately, everyone’s also guilty of investment mistakes. Here are six of the most common blunders to stay away from:
1. Falling in love with the story
If you fall for the story behind a company, or its product, you may not see fundamental flaws, poor market conditions, or overpricing of the stock. Marketing experts agree the best sales job is achieved through telling a story and not by talking numbers and facts. Stories get you emotionally invested, far beyond what plain facts could ever do.
2. Believing things are different this time
Believing you stumbled on something new or different in the investment world can get you in trouble. Simply put, it’s never different. The odds of successful investing never change. No matter the decade, only a certain percentage of investments will outperform the rest. Monumental shifts occur over a lifetime, not overnight.
So stick to the tried and true. Nobody ever went broke by steering clear of new kinds of investments, especially anything that reeks of financial engineering.
3. Confusing good ideas with good investments
Sometimes people will use a product or service — think social media, or marijuana stocks or online gaming — and immediately classify it as a can’t-miss investment. The first mistake is usually the assumption that they are early to the game and have caught something the rest of the investing public has missed. The next mistake is extrapolating personal usage into expectations for more widespread popularity. The third error is expecting wider product adoption to naturally translate into profitability. Lastly, even profitability does not guarantee an attractive investment if the shares have been overpriced.
How many investors held onto BlackBerry for too long because they loved the product, and missed the fact that they were in the shrinking minority? This works in reverse too. Don’t shy away from a stock just because you don’t like the product or company. Hate Wal-Mart? Too bad, because it’s gone up 50% over the past three years.
4. Reaching for yield
Don’t delve into riskier investments simply to pick up a few extra points of yield. A yield over a certain point in this market tends to be a warning sign. A few extra points of yield earned over a year can disappear in minutes when negated by a capital loss.
5. Focusing on the near term
There are plenty of reasons to focus too much on the near term. The vast majority of investment research is based on a 12-month outlook, and portfolio performance is measured on a quarterly, if not monthly, basis. It would be fair to say that because of this, getting the timing right is half the challenge when it comes to investing. Nevertheless, there are times when quality stocks get beaten down by the market for various reasons. All you need is a patient hand.
This brings to mind a Warren Buffett quip: “No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.”
6. Riding winners too long
Holding winning stocks for too long can be just as costly as sticking with losers. The best way to avoid losing a huge paper gain is to sell gradually on the way up. It’s hard to argue against booking gains, but the psychological hold can be strong. A set approach to selling a proportion of winning holdings at certain levels can help to avoid this investing mistake.
Remember, following rules is investing. Following emotions is gambling.
As always, please do not hesitate to communicate with the writer if you would like additional information on this topic.
Joel Attis is a Senior Financial Advisor with AttisCorp Wealth Management and IPC Investment Corporation. Comments or questions may be submitted to Joel at firstname.lastname@example.org, or he may be reached at 855-1155.