“Mistakes are part of the dues one pays for a full life,”
- Sophia Loren
Every professional and profitable stock investor out there made mistakes in their journey to successful investing. Some still do. It is by these mistakes we become better at what we do. If you don’t make a mistake you will not grow and improve.
Every investor wants to become better. Even the best of the best crave for improvement. Not only in the field of investment but in other fields such as sports, trading, fitness, entrepreneurship etc. That is why we train, practice, and read almost every day.
If you don’t learn from your loss, you are likely to repeat an act and bear the loss again.
You buy shares of a certain company. You make a loss, learn from your loss.
The questions you should be asking yourself are why did I lose? What did I miss? What did I not anticipate? What can I do to solve this problem?
Here are 7 mistakes in stock investing that you should be aware of.
- Buying company stocks you only know or love
If you are building a team of football players, will you convert a prolific striker to a defender?
I guess not. If so, is it then right to buy a company’s stock because its brand name is popular?
You might know them, you use their product. You might love the company.
But what you don’t know is that this company might be finding it difficult to pay its debt or might be cooking its books to look good or the company might be facing legal skirmishes.
Do well to study company’s fundamentals before making a decision to buy their shares or not.
- Failing to manage your portfolio
Every passive investment requires the investor to manage his/her portfolio. You can’t manage what you don’t understand. A good understanding of a company’s fundamentals can direct you on what to do.
To manage your stock portfolio, you will need to observe the business operations and health which tells you, the investor, whether to buy more stocks or to sell some of your stocks to rebalance or to cut your losses.
- Investing based on emotions
This is a herd mentality kind of investing. Here investors are interested in the hottest stock. Your investment decision is based on social discussions. What are the words on the street?
This kind of investing, you are controlled by the fear of missing out on these hottest stocks. So you follow everyone and buy without a plan, only to end up regretting the loss of your capital.
- Failing to understand a company’s business model
Understanding how a company operates its business is like an investor with an eagle’s eye view. A company might be generally known for what it produces and sells but they can also have other ways it generates revenue that is not well known.
Only fans of the company and serious investors knows all its sources of revenue.
For example, Apple inc is generally known for producing and selling smart gadgets like I-pads, I-pods, I-phones and Mac books all around the world.
But Apple has other sources of revenues that an investor should be aware of, like they sell apple music download. This an android user is likely not to know.
Sources of company’s revenue can be found in the business section of the 10-k.
- Focusing on short term returns
Studying a company’s business is different from studying the company’s stock chart. An investor should be interested in the company’s fundamentals.
Studying stock charts are for day/swing traders looking for short term returns. They focus on price movement and patterns formed in recent times to make price predictions.
Buying company’s stock makes you a part owner of the business. So you should think like a business owner. As the business grows your stock value appreciates in value.
- Having unrealistic expectations
The stock market has made many people millionaires and billionaires. But these set of persons had the skill and experience required to profit big from their stock investments. These fellows put in the time and research. Buying a stock blindly can be a big setback. Learn before you earn.
- Failing to compound your investments
Think of your investments like a plant. Failing to compound your investments is like a plant experiencing a stunted growth. When a plant is lacking nutrients, It doesn’t grow fast and it is unhealthy.
A plant needs to be watered. The ground should contain manure or fertilizer needed for the plant to grow.
For your stock portfolio to grow faster and healthier you need to keep compounding. Failing to compound is bad investment practice.