Successful investing takes discipline, commitment, and the courage to ignore what the crowd thinks. However, it’s easy to succumb to these 5 investment mistakes when you lose focus.
1. Not Doing your own Research – Folks it shocks me that day traders and individual investors alike pick up the paper, look at a trend line, log into their on-line account and buy. That’s reckless. Stocks are the currency of corporations. They are money, and too many of us throw money at a stock as if we were gambling. And Guess what, the odds are worse than at the casino. Want to reduce your investment down side dramatically? Take an extra 5 minutes and determine the relative value of your potential investment (Price Earnings Ratio, Operating Income multiple) against its industry competitors. When I look at Dell as an investment, I also look at HP. Is Dell by these easy ratio’s priced at a lower multiple? An equivalent Multiple? Or at a higher multiple? If you think, as I do, that Dell is a better company than HP, then buy it IF it is trading at a lower multiple. This simple relative value review which can be done on yahoo or google finance will prevent most short swing losses which are your biggest enemy.
2. Momentum Trading – I have watched great traders get burned regularly by momentum plays. The Market for a certain stock goes up quickly and in they go, under the belief that the liquidity is so great that they can get out if they need to. These same expert traders, and many I work, with forget that there are other traders that have already hedged their upside in the very same stock, and therefor they have already locked in their profits and are now just watching the rest of the herd speculate.
3. Not Staying Disciplined – Here’s what I mean. Each one of us has our own investment model / reasons. Write it / them down. Stick it to your computer screen. Each time you make a trade or investment, look at your model before you click “buy”. Think about how many times you have hurt yourself by playing outside that model.
4. Believing that a Quick Investment Return Validates Your Expertise – Guess what, you are not an expert. Not even the so called experts are experts. See the Market recently? Quick Investment returns are luck people. They were made by your decision to speculate on an issue before some other Speculator bought those shares. That’s called the Greater Fool Theory. If you think it something else, you will be the Greater Fool next time.
5. Blindly Following Your Broker – I know you have heard this one before, but having run 400 Broker’s myself during the late ’90s and through 2006 – I can tell you that Brokers, Investment Managers and Advisers, have no better information than you do. In fact their information is almost entirely speculative and momentum driven. Please do not agree to a trade without being in front of your computer screen so you may at least follow the steps laid out in 1) above. And by no means believe that the research analyst suggesting the trade to your broker has done this either.
Remember, you can’t grow your portfolio unless you protect the gains or principal your brought to the table. Disciplined investing by your own definition with a few helpful downside protectors is really the best method to winning in the stock market.