How to Fail at Stock Market Investing
Written By TarikWhether you’re a stock market investor or trader, failure is the last feeling you wish to experience. Trader Gav wrote a great post on failure signs of a stock market trader, but what about the failure signs for investors? I can associate with all 4 signs because I’ve made the same mistakes as an investor.
Laziness
My Worst Example of lack of Research: EFJI - I bought shares of EFJI in 2006 about a week before company earnings were released. I don’t know how I missed this, but I made the mistake of trading around earnings. Earnings came out, and the stock dropped 25% in the next two days. If my analysis were more in-depth, I would not have missed this crucial piece of information.
Lack of Focus
My Worst Example of lack of focus: Foreign ETFs - When Barclay’s released their Ishares ETFs, I quickly bought into a few emerging markets ETFs because of their massive growth potential. What I failed to realize was ETFs are completely incongruent with my non-retirement investing portfolio. About a month later, I sold off the ETFs, and blew $30 in commission fees total (buying and selling them off). It’s easy to buy into the latest hot stock, mutual fund, or ETF, but is that popular security appropriate for your portfolio?
Overconfidence
My Worst Example of overconfidence: XMSR - In my first 2 years of stock market investing, I bought into XMSR at around $4 per share. In the following year, the stock rose to $36 a share, and I sold off most of my holdings, finalizing a very nice gain. My stock market success fueled my inner greed, and I began buying more dollar stocks without doing the proper research. Of course, these stocks performed poorly, and I ended up selling off my entire portfolio to start fresh with ShareBuilder again. Instead of becoming overconfident, I should have analyzed XMSR even further to understand why the stock performed so well, and then searched for the same characteristics in comparable stocks. Lesson learned.
Taking Losses Blindly
It’s hard to ignore losses when you hate giving away money as much as I do. Due to my long time horizon, I’m fairly patient with strong companies that will perform well in the long run. But if you’re investing for income or other short-term events, then you should closely track your losing investments. Here are a few questions that I like to ask about my losers:
- Did I do enough research before buying?
- What angle did I miss?
- Is competition becoming heavy in the sector?
- Why Shouldn’t I sell?
Some investors may focus entirely on Wall Street’s reactions, but I feel that any stock market losses are 100% my fault. It’s a complete matter of judgement, but if you take complete responsibility for your bad investments, you won’t make as many in the future.
Nobody is perfect. Agreed? (Stay updated on my stock market journey by subscribing to my RSS FEED)
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Post/Read Comments
January 30th, 2007 at 10:36 am
Hey TJP,
I’m waiting for your review of online trading companies like: etrade, ameritrade, scottrade, schwab, ect. Course I signed up for scottrade about 4 months ago so it’s too late I guess for me. Who do you use?
mark
January 30th, 2007 at 2:49 pm
I had the same experience with penny stocks (or dollar stocks) several years ago. The only reason I bought those stocks was that they were cheap, so even if I lose money, it won’t be at a level that I couldn’t handle. Well, I bought a lot of those stocks and ended up didn’t make money with most of them. There are reasons why the stocks go so low and could continue to go downward.
January 30th, 2007 at 3:37 pm
That’s a very good point, Sun. Stocks are cheap for a reason, usually one that penny stock investors simply ignore. Strong companies produce profits, which entices investors to buy company stock. I think if more people understood how supply and demand works, then many investors would ignore the penny stock game.
I still buy cheap stocks now as speculative plays, but only when the company has produced profits in the past and has a profitable business model. I picked up ROIA and RAD. Might pick up some shares of SIX if Daniel Synder can make the amusement parks profitable again.
January 30th, 2007 at 3:43 pm
mark - I have accounts with Fidelity and ShareBuilder. I chose Fidelity for my Roth IRA because they are very professional and have no-load freedom funds.
As for my non-retirement portfolio, I opened an account with Share Builder, and was well aware of the expensive real time trade commissions. I kind of did so on purpose to discipline myself from conducting too many trades. When you pay $15 per sell, you don’t sell your stocks that much.
I’ve heard good things about Scotttrade. You can read my Scott Trade review, and I’ll be sure to post my updated brokerage reviews.
February 6th, 2007 at 3:25 am
Hi TJP, Thanks for the mention.
Interesting blog. I enjoy it.
Keep up the good work.