Avoiding these mistakes dramatically improves returns
6 Sins of new investors, covers common investing sins and opens the, White Top View series: Playing Market Odds. Links to all parts of the series are at the end of this post. The investing sin list:
6 Sins of new investors
News based investing = bad news!
The wide-ranging list includes: making investments based only on a media report, investing without research, holding investments that are losers, investing in turnaround or bankrupt companies, averaging down by buying more of a loser, not learning about or paying attention to investments.
These 6 Sins of new investors are mistakes that have the nasty habit of being costly. We must learn about them, avoid them and quickly correct these mistakes should we make them. If you fall into any of these investing traps, get out as soon as you realize you have committed an investing sin! Rescue your money and get it into a profitable position.
6 Sins of new investors are common errors made by far too many inexperienced investors. However, they have lots of company. Some very experienced investors and far too many financial advisors, that should certainly know better, commit these expensive financial sins!
1. Event or news based investing = bad news!
The first of the 6 sins of new investors: investing based only on a news story. Investing in a company only because of media attention usually produces poor financial returns.
News cycles are short and the stories change daily. Yesterday’s story gets replaced by a new one. News is new. Even a big event story typically fades in under a week.
Events happen, get reported and pass into history. Most often that happens without having any lasting effect on the value of a specific company.
A business or industry may get positive or negative media coverage, but that usually has little long-term effect on shareholder value. Don’t invest just on news. Find underlying value before investing.
Investing, trading or speculating are each different
Learn the differences between investing, trading and speculating. Here we are talking about investing.
If you are investing, take a long view. Check into the background of the company that caught your eye or ear. But also look forward and around. Consider prospects and possibilities for the company and consider the context. Consider how it fits, effects and gets affected by the industry and the economy.
When serving as a CEO, I learned how to get publicity and always welcomed media attention. New investors were often attracted. Publicity was also very good for attracting customers. By attracting media attention and being in the news, more people become aware of the company. Awareness helps make doing business easier.
Generally getting publicity works well for the company involved. My warning here is not to either buy or avoid companies in the news. Rather, it is to never make that the only reason why you buy or sell. Do the homework.
There is money to be made by playing news cycles. But as a trader, or a speculator, not as an investor. In other blog posts we discuss the differences between investing, trading and speculating. We can then go over details of why each requires using different strategies and tactics for success.
2. No research = blind investing
The second of the 6 sins of new investors: investing without research. If we miss doing our investing homework assignment, we pay by losing money or opportunity.
We must do the research on each investment. Do the research before investing. Yes, I know, I harp on this point. It is so very important. Doing homework is at the very core of investing success. So I say again, do your homework and you can become a superior investor.
Doing your homework can help you get richer
Failing to do the research is a very costly mistake. You can get lucky but you can’t always fake this test. It can put lots of money into your pocket! You can’t possibly find work that pays a higher hourly rate then what you can make for the time spent doing investing homework. Decide to get richer, do your homework!
3. Loser holdings kill money
The third of the 6 sins of new investors: holding companies that are losers. Investors need both a long view and patience. But that does not mean you must hold forever.
Sell, when and as soon as you know, that you have a loser. Do not carry a losing stock. Get your money out and bring it back to life by selling losers.
If a stock or the market declines in price, our homework pays off by helping us make good decisions. Being informed about the market and economy, as well as knowing the companies in our portfolio, allows us to make informed decisions to buy, stay or sell.
Doing homework also prepares for price changes. When prices move down we then find ourselves in a good place. We can see if the market is having a short-term emotion driven hissy fit, a dip, a correction or if something more significant has happened or changed. We can be among the earliest to see and correctly react to a downturn.
The market regularly reacts with emotion driven hissy fits. Don’t let the noise, trading action and drama frighten you off.
However, we do need to act when things change. Sell when the facts change to negative. When facts change to create a new negative reality, we must accept that new reality. And immediately sell! We discuss this in greater detail in other posts.
When normal leaves you should too
When the facts go negative, they are not going to get back to “normal”. The changing facts means that the negative picture is the new normal. The old normal is gone and like yesterday, will not come back. Sell, and give the recovered money new life by being ready to invest in your next winner.
Think of our job as investors as a simple one. We invest to make our money grow, to make more money for us. We do not invest to support or be the fan of any company.
Rather we are the biggest fan of our money! Investing well means putting it to work doing what it should do. Bringing more money home to you!
Avoid the turnaround money coma
Waiting for a troubled company to turnaround is not a good investment strategy. That approach kills money or at the very best, can put it in a coma. Don’t let your money die or sleep. Get your money out of losers and back to working for you elsewhere.
I spent my business career doing turnarounds. Few turnarounds are kind to small investors. Turnarounds can be fantastic investing opportunities for informed and experienced players. However, this is a very specialized area and certainly no place for an investing beginner. Learn first, gain investing experience and then we can talk about turnaround investing.
One-two-three related mistakes of holding losing investments
On significant stock price drops, far too many people hang on. It is very common and very normal human behavior. But it is a mistake. Too often holding on is the first of a related series of three mistakes. The correct move is selling as soon as you realise you hold a loser.
Compounding the first error of riding the price down, many inexperienced investors intend to simply wait until the price recovers. Even when they realize they have a loser, they decide not to sell.
That decision means they may wait for months or years holding a losing position. That is essentially dead money. That is mistake number two. Rather, get the money out and get it to work making money.
Mistake three often occurs should prices recover. Often poor investors ride through the months or years of losing only to sell a rising stock when the price reaches their original investment price. They think, with great relief, I got my money back!
Selling at that point makes certain you have no upside opportunity. It also ensured that waiting for your return to zero has kept your money away from any profitable investment. That is opportunity cost. The cost of missing the positive investment opportunities instead of holding dead money.
As soon as you can, bring dead money back to life. Only use money to invest in stocks that make you money.
Those one-two-three mistakes are normal but costly investor behavior. You are fooling yourself to think that loss is not real until you sell. The best loss possible is the first loss. As soon as you know you have made a mistake, take the hit, sell and get the money to work making money.
Superior investors are not normal, they are exceptional
To get superior results you must make superior choices and take superior actions. Take action and sell when you know you have a loser in your portfolio. Do so and get the money to work making you money. That simple change will make your portfolio sharply outperform investors that stay with losers. Selling losers gives you a key strategic advantage and makes you money!
Weeding losers out of your portfolio regularly puts more money into your pocket. Avoid the 6 sins of new investors and move a big step forward on the path to becoming a superior investor!
Next Part 2 of the White Top View series, Playing Market Odds, continues our discussion of 6 Sins of new investors or common investing mistakes. Buying losers, averaging down and making investments without paying attention. Links to all seven parts of the series are at the end of this post.
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Have a prosperous day!
These discussions and information intend to help you better understand markets and investing. I am not a financial or investment advisor; opinions are for informational and educational purposes only and are not intended as investment advice. For syndication of the site or blog, please contact info@WhiteTopInvestor.com. © 2014 Bryan Kelly
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Links to all parts of this series follow: