The 5 Major Investment Mistakes
It is not difficult to find a recipe for how to invest to make a fortune. Unfortunately, such a recipe for success can do more harm than good. Beginner players should get acquainted with the most common mistakes in investments, not to lose all of the money invested at the beginning.
Below are five major investor sins and my advice on how to deal with them:
1) Lack of any investment plan and strategy
The vast majority of investors (especially those who are beginners) do not have any investment plan. If the investment succeeds, then, of course, nothing will happen, and they will get profits, but the problem arises when the cases take unfavorable turnover. The investors’ most frequent questions sound like this: “I am on a 20% loss on company X, and I do not know what to do – keep or sell?”
Your plan or investment strategy should be created before taking a position on the market, never during the investment. This does not conflict with modifying your assumptions, but some of these assumptions must be at the very beginning. Therefore, before investing, write down a simple investment plan on a sheet of paper for each company or other assets. An investor must have a certain percentage of his capital, which he is willing to spend on a given investment. If the strategy foresees investing in dividend companies for 30 years, then, of course, the price of the shares is not too unusual for us, and you can even average it by making successive purchases, but this must be determined and written at the very beginning. You cannot choose stocks to buy now with a view to short-term speculation with a 20-30% profit in mind for better quarterly results and then, after entering a loss, convince yourself that it will now be a long-term position.
2) Lack of capital management rules
I believe that it is not so important what we buy and at what price, but for what percentage of our capital. Another issue is risk tolerance, e.g. setting a maximum acceptable loss on a single transaction. I wrote about it already in the first point, but stop-loss – set automatically is a part of the capital management.
What is this capital management?
For a mature investor, this should be his tailor-made investment system in which he should determine for what maximum share of his capital he can enter into a given asset and what maximum loss in that individual position he allows.
3) Overconfidence and overestimate abilities
Warren Buffett claims that if a high level of intelligence does not go hand in hand with emotional stability and ethics, it can even kill you. Unfortunately, the vast majority of people overestimate their skills and the level of their competence. The statistics are horrifying that only a small fraction of men are willing to admit that they are poor drivers and lovers.
It often seems that the vast majority of people after a month or two of independent investment, if their investments are on the pluses, consider themselves as good investors. It also results from the flaws of the human mind, which attributes itself to all merit, while its errors blame everyone around themselves. This is a criminal prosecution for which investors often have to pay a high price on the market.
4) Failure to admit an error
This point is a derivative of the previous one, but it is so important that you have to stigmatize. The best clients of brokerage houses and brokers are businessmen of success who are convinced of their size. They are coming out of the erroneous belief that if they managed to build a well-earning company, they would succeed in the stocks to buy now market as well. Nothing more misleading and the reality turn out to be brutal. Very often such “investors” bring more money powering accounts of brokers and brokerage houses to the delight of these institutions.
A typical, novice investor has one major disadvantage – he cannot cut losses quickly. While in the long-term strategy, if it is to be adopted, transient capital withdrawals are not unusual, and the short-term speculator must strictly apply the iron rule of quickly cutting small losses!
5) Too quick changes
Again, I refer to the words of the famous Warren Buffett. “The stock exchange goes from active to patient,” and it is hard to disagree with this claim. It is common that one day an “investor” says he wants to increase his involvement in the shares of a given company, and the next day he cancels it and announces that he sells all of his shares. Not only that – some people treat the stock exchange as entertainment – a substitute for some computer game or gambling. If you treat investing like this, then give it away at the very beginning, because you will fall with some difficulty before you understand your mistake.
Active investors are on hand only to brokerage houses, as they generate a significant turnover. For an investor, always selling and buying shares are a lot of transaction fees, and you should also remember about the tax that you have to pay on profits.