In this article, I'm gonna go through 5 mistakes that you should never make when you are investing.
When you're searching for companies to invest in, there is an endless number of resources that'll tell you what you need to do so that you make sure you're buying the right stocks and taking the least risk.
I have read many of these resources and summarized these into 5 simple mistakes to avoid as an investor.
#1. Chasing After Speculative Short Term Gains
I remembered attending a seminar before - and the speaker was sharing about how you should take advantage of product launches.
He used the release of iPhones for example - and the words that he was saying...was almost utter rubbish.
To give you a little perspective, let me share with you what he said.
He said, "Buy the stock when Tim Cook picks up the microphone, and sell it when he shows the world the new iPhone".
He further caveat that, "This does not work every time, but when it does - you will make a lot of money."
To me, the idea of that is ridiculous - it is a pointless statement.
And strangely, people who are blinded by these short term gains, ended up being glued to the screen watching Tim Cook live during the new iPhone launch.
That is what greed does to you...and it is almost upsetting that people think the investing profitably in the stock market is about a coin toss.
I can assure you that there are time-tested ways for making money consistently in the stock market - will there be fluctuations? Yes. Will you make money in the long run - also yes (as long as you follow the right strategy).
#2. Investing In What You Don't Understand
One of the fundamental rule as an investor is what Warren Buffett calls it, “Stay within your circle of competence”.
Whenever there is an oil price plunge, I have seen many people saying oil is cheap now, buy oil.
And I would ask them, “Why do you think oil is cheap now?”
And they will say, “Well...if you look at the previous prices…”
The moment they said that, I tuned out - because I know they are not investors, they are just speculators, people who will not make money consistently in the stock market.
We never based our valuations on previous prices - we base on valuation based on the earning capability of the company.
And the truth is, most of the time, they don’t even understand the oil and gas industry.
(It is a complex beast.)
So always stay within your circle of competence and don’t ever blindly follow someone’s tips. Even if that someone is Warren Buffett.
Here’s the problem with following a guru to invest:
The whole point of being a great investor is to have independent thinking.
(Which is why I never give any stock tips in my blog posts, but I give you the frameworks that can help you decide as an investor)
So what do I do when I hear someone recommend a stock?
Well, I run it through my checklist - and if it fits my criteria, I will proceed with valuation and invest.
In this checklist, it outlines all the criteria that I would check before investing in a business - and it has served me really well.
Why does the checklist protects me?
Well, it prevents me from mistakes 3 and 4.
#3. Investing In A Loss-Making Company
One of the most important qualities you're looking for when you're investing is in a company that is making money in the first place, especially when you are starting out as a beginner.
Too many people are looking for a quick buck in the stock market - and they ended up investing in companies who are going to go bankrupt.
Article from CNA on 23 May 2020.
This is an example of Hertz, that files for bankruptcy - and logically, people wouldn't take the risk and invest their money in them.
(Unless, they enjoy putting their hard-earned money at risk.)
Take a look at this chart.
It is whopping loss of 92.84%.
This means that if you put $10,000 in this stock, you would be left with $716.
Ouch, painful - isn't it?
But here's why I would never had invested in this stock.
The company has been losing money for the past 3 years, and it has enormous debt.
If you checked through the 8 Point Checklist - this is definitely as investment you would'nt have invested.
Focus on the fundamentals and the stock market will reward you in the long run.
#4. Staring At The Stock Market
When I was teaching investing, I always made fun when I find students who kept looking at the stock prices.
I would ask, "Do you think you can control the share prices?"...
..."If no, then just close the laptop, and let the market do what it has to do."
You see, once you have invested in an undervalued quality investment - there's nothing much you need to do.
I hate it when people are wasting them staring at the stock market screen...
The stock market is a place where you exchange money for money, and NOT time for money.
So please - stop exchange your time for money, trying to do senseless activity like "controlling" the share price.
Time is the most important resource that you can have.
Instead of spending more time in the stock market, you will find yourself doing much better when you spend less.
#5. Comparison With Other Pros
Comparison is the theft of joy.
I have met many other investors who are making 30% to 40% annually.
I have met a few rare cases who makes 50% to 60% annually.
Consistently, by the way.
And many times, it is easy to fall into the trap of comparison - I am only making 10% per year...and end up feeling inadequate about ourselves.
Here's a new perspective for you.
What if I told you that, these people who are making these insane amount of returns consistently every year, because they studied and practice their crafts for years.
They committed time and effort to master their craft.
And if we are expecting to produce the same results without putting in the same amount of time and commitment, then we better re-evalaute ourselves.
Now, I am not asking you to go to those extremes.
But just know that, comparison is the theft of joy - so don't beat yourself up, just because you are not making the same returns as others.
And if you do want to create the same results as others, then be prepared to work your ass off, just like what they did.
Conclusion
These are the five most common mistakes that I find among investors - in fact, me myself, have made all of these mistakes before.
And this is exactly why I started Passive Seeds and to write a blog post every week, to share these knowledge.
After all, a smart person learn from his own mistakes, a wise person learn from others.
So which mistakes are you personally guilty of?
Is it chasing short-term gains?
Or is it staring at the stock market for hours?
Leave a comment down below!
P.S. If you are not sure how to find quality stocks for investing, do check out the "Funnel Method" Blog Post that I have written for beginner investors.