10 reasons why people fail when they start investing Pt 1
Sometimes while investing we tend to fall deeply into our emotions. Human beings are programmed to develop logical patterns in our brains to make everything seem more logical. Have you ever seen a stock chart and make the assumption the stock is going to go up because of its historical pattern?
When investing it is hard to let go of our stocks because we fall in love with our investments, it’s not too much the data or research we have done that determines whether we buy or sell, but sometimes it is our affection and the fear of being wrong that determines whether we buy or sell.
Quick Solution: Stick to the numbers: Stick to your strategy and keep a cold head when it comes to investing.
Not knowing what you own
Peter Lynch author of “One up On Wall Street” (Famous Wall Street Investor) was a huge advocate of “Knowing what you own”. Remember that when we are investing in stocks we are buying businesses and knowing how the company operates is crucial.
The reason why many people fail when they start investing is that they perform the valuations and have found the stock to be “cheap” but they don’t know anything about that sector or what does the company do. It is important to know everything there is to know about the business you are buying (stocks) because your money is on the line.
A lot of good things can happen because of this, first of all it is incredible what you can learn about successful companies and how they operate. The knowledge you get every time you select a stock will follow through your other investments making you a better investor with your own points of view every time.
Quick Solution: Read the 10-k’s, Listen to the conference calls, and get your hands on every piece of public information there is about the company.
Not doing the homework
Have you ever turned your TV to CNBC and heard incredible analysts speaking about how awesome a stock is and felt tempted to get your hands on it?
I think this is the problem many of us face while we start investing and I consider it one of the main reasons why people fail while starting.
Nobody can say it better than Benjamin Graham in his all-time favorite book “The Intelligent Investor” “If the reason people invest is to make money, then in seeking advice they are asking others how to make money”
Don’t get me wrong many analyst do know what they are saying, but is crucial to do your own homework. Many times individual investors outperform the big guys read my article “Can you invest without a college degree” for more on this. Take in mind that many of these “all-star” investors speak in a biased way that may benefit them. I can’t stress enough how profitable it can be to develop your own strategy and perform your own research. Remember that you are playing with your hard earned money and it’s not something to play around with.
Quick Solution: Educate yourself! Read as many books you can to become a savvier investor (Check our Top Investment Books You Should Read) or take our Free Investments Class it contains everything you should know to start investing successfully.
Bonus: Check our Resource Page for a complete list of Resources to help you with the homework.
Waiting for the right moment
This is a mistake that can be easily avoided. After we have done all the research and homework on our desired stock we find ourselves ready to buy, but the mistake we make is that before buying we look at the monthly chart and find out that the stock has been moving up for the last couple of days, weeks, or months and we get scared. This comes once again to the belief that we can make everything rational.
Sometimes it is ok to wait for a pullback, but what if the pullback never comes and we find ourselves just seeing our stock skyrocket while we wait on the sidelines? We just missed the opportunity to make some serious money!
If our research is done right and our stock prediction appeals to be the right one, don’t hesitate and start buying. If you are still nervous that the stock might come down start by buying small chunks of it, the worst thing that would happen is that your small portion lost money but you are ready to buy more of it at a discount price. I explain more on scale investing on the article: How to reach a winning position
Quick Solution: Go for it!
Refusing To Diversify
This is where the saying “Don’t put all your eggs in one basket” comes into play. If you decide that Starbucks (SBUX) is an awesome investment and put all your money into it what will happen if consumer-spending reports lower than expected and the retail sector is affected? Wouldn’t it hurt Starbucks too? But what about essential goods such as your toothpaste and cereal, would people stop buying those essential goods because they are budgeting? No, that’s why you own Proctor and Gamble too (PG).
Instead of losing a large portion of your money you balance out your wins and loses making your portfolio stronger and less volatile to whatever the market might throw at you.
Where many investors start failing when they start investing is that they are so confident their stock is going to skyrocket that they put all their purchasing power into it. It is true diversifying will not bring you those huge gains an individual stock might bring, but it can help you to always make money no matter what the market will bring, if you lose at least you will not lose as much.
Quick Solution: Own at least 4-5 companies in different sectors.
This is the end of Part 1 but you can’t miss the second part.
Continue Reading by going to Part 2 of this post.
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When I first started investing I took a massive hit on my portfolio just to teach me the most valuable lesson of all. Enter your email below to get more of the full story.