I have been investing now for more than 15 years. It’s not much compared to some of the pros, but, during that time I have experienced successes, positive surprises and some great results,. However, along the way I have also had some massive disappointments, significant losses, and in retrospect, made unnecessary mistakes.
I am sharing some of those mistakes here (both from me and from others), because I see these as being very common problems that a lot of beginners face when they are beginners in the investing realm.
Hopefully you will avoid these same problems, or at least be more aware of the potential traps and pitfalls that are out there!
So with that, here is a list of 9 beginner investing mistakes to avoid (at all costs):
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1. Falling In Love With A Stock
Number one on the list of investing mistakes that beginners make is falling in love with a stock.
This is the problem of you following a stock for a long time (including doing a due diligence) and ultimately purchasing the stock because you believe it is the right stock, at the right time, for your portfolio.
However, somewhere some time passes, and that once shining star begins to fade. Maybe there have been financial setbacks, competition is closing in, there are rumours of accounting problems. . . it doesn’t matter. . . the stock no longer meets the investment criteria which caused you to buy it in the first place.
Yet, whether due to unfounded hope, unrealistic expectation, refusal to recognize reality, simply a fondness for the stock, or an unwillingness to admit that perhaps you made a mistake, you hold on. After all this stock was perfect for your portfolio when you bought it. At least that’s what you told yourself!
In short, for whatever reason, you are no longer considering the stock rationally. You have “fallen in love with it.” This can happen very easily, especially if the stock did very well for you in the past.
It is hard to believe that this once rising star, is no longer the stock it once was. Believe me, there is no room for romance in the market. The facts are the facts, and if your stock is not performing, or no longer meets your criteria, you need to move on!
One of the reasons that Warren Buffett is one of the best investors of all time is because he is able to separate his emotions when purchasing stock. His quote perfectly sums it up: “Be fearful when others are greedy and be greedy only when others are fearful”.
2. Thinking It’s Different This Time
Remember the Tulipmania of 1637?
Likely not as it was over 300 years ago…
It was when tulip bulb traders bid the prices on tulip bulbs up to the equivalent of $1k + (today’s price). A lot of tulips were traded, money was made, but then the bubble burst. Just as fast as money came in, it was going out again. People were sensing the irrationality of the situation. They were starting to realise that they were only trading tulip bulbs.
Before the crash, the Dutch traders thought that this was a “new phenomenon” and there was no limit to how high tulip bulb prices could go.
Does that remind you of the Dot.Com bubble? Remember when the internet was still new and so many companies appeared on the horizon with no profits but great promises, and price earnings, for those that did have a profit, were out of this world. Until they weren’t, when the market came to its senses, and the Dot.Com bubble burst.
Or perhaps you might want to consider the housing bubble where everyone thought that housing prices in the US would go up forever. People were using home equity like an ATM, investors were buying houses and flipping them like there was no tomorrow, banks were loaning money to anyone who could breath. After all how could anyone go wrong with housing values increasing every year. . . where was the risk?
There wasn’t any. . . until there was.
Don’t think that bubbles won’t occur again? Don’t think that it is “different this time.” Take a look at Bitcoin. Some people have already drawn parallels between tulips and Bitcoin, saying that (cryptocurrency) is just the tulip bubble without aesthetics.
It can will happen again, and it can happen to you. Good judgment and common sense are your best protection!
Remember, if something sounds too good to be true, it usually is…
3. Not Diversifying
Andrew Carnegie once said, “Put all your eggs in one basket, then watch that basket!”
Great advice if you think you know more about the stock market than the market does.
No matter how well you may know a company or a sector something unforeseen may occur overnight and an individual stock, or even a sector can be hit very hard before you have a chance to sell. For example, a natural disaster such as a storm or earthquake can devastate even the best of companies. Or what about a pandemic? COVID-19 ring a bell?
These types of things are unforeseen, and can easily cause the stock price to plummet. If your investment is in that one stock, then there is absolutely nothing you can do (unless you have sold options protecting yourself – which in itself is a form of diversification).
Putting all your eggs in one basket just isn’t a good idea in the investment arena.
4. The Dangerous of Buying on Margin
One of the biggest beginner investing mistakes you can make is to get involved with margin.
Buying on margin is super easy. Everyone wants to offer you cheap money (with most advertising how inexpensive it is to borrow) and at the same time will give you a list of high paying dividend stocks that you can invest in.
It seems like a great way to easily make money. After all isn’t making a fortune on other people’s money the way to get rich?
Well, in an “up market” this works great. Just imagine how much money could have been made with borrowed money during the Dot.Com boom when tech stocks were skyrocketing. There is no doubt that some people made a fortune. But how about the investor who borrowed money and bought stocks at the peak of the bubble and saw the market crash in front of his very eyes?
Even worse what about the investor who bought at the peak with borrowed money and then went on vacation feeling he was in great shape only to find upon his return that his tech stocks had crashed and his broker had sold him out in order to pay off his margin debt.
There was even the possibility, if he had been invested heavily in certain stocks, that he ended up owing more money than he had invested in the first place and therefore had not only been sold out, but owed his broker money when he came home from vacation. Hope he had a nice vacation because now that he was back in the real world he was just beginning to realize how much risk there really is in borrowing on margin.
It is important to look at the worst case scenario when buying on margin, and be prepared for it to happen. While it doesn’t happen very often . . . it does happen! If you don’t understand how this could happen, you shouldn’t be considering buying on margin!
5. Overconfidence – Do You Know More About a Stock Than the Market Does?
It may be because you worked for the company. It may be because your closest friend works for the company. It may because that company is your customer. It may be that you are a customer of the company. Whatever the reason is, you feel that you are very close to management, you know what is going on, and perhaps you have a pretty good idea of what is going to happen in the future.
Excluding insider information, which clearly you are not allowed to use, it is extremely unlikely that you know more about any particular stock than the market. Now you may think that you do. Maybe your judgement along with your familiarity with the company has served you well in the past, but I repeat, it is very unlikely that you know more about a given stock than the market, much less what may happen in the future.
Think about how often the professional analysts are wrong. Are you better than they are? It is a much better policy to base your decisions on the basic fundamentals and market trends, rather than your own specific “feel” for the company based on your familiarity regardless of how close you are to the business personally.
6. Not Taking Profits
You may be investing for the long term. You may have made some excellent stock selections based on very sound fundamentals and a carefully developed criteria for investing.
Suddenly, one of those stocks takes a huge jump in price. . . up maybe 20 to 30% or more in one day. This was a total surprise to you. It may have been the result of a short squeeze, or an unexpected profit windfall for the company. It may have been the result of a competitor’s good fortune that carried over into your stock. The point is that your stock has taken a very unexpected, very large increase in price. Your mind quickly figures what would happen if this trajectory were to continue and you start to see imaginary future dollar signs.
Realistically it is very unlikely that a given stock will hold on to an extraordinary rise in price. Others will see it and take profits. Unless you are very sure that the rise in price is justified by a change in the fundamentals it is a great idea to take some profit, especially in tax efficient account such as an IRA (America) or an ISK Account (Sweden), where there is no tax consequence when you sell a stock.
At least consider selling off a portion, taking a profit, while at the same time keeping your dollar allocation to that particular stock at the same level as you initially planned. This type of re-balancing should be done on a regular basis anyway.
While stocks don’t always move logically, it never hurts to take profits, especially when they are extraordinary and unexpected. If you don’t chances are very good others will, and you will watch those higher stock values disappear as fast as they appeared.
7. Catching A Falling Knife
You’ve been watching a particular stock for a while, and, while it seems to meet your investment criteria, and the fundamentals look good to you, the price just seems to keep dropping. It may be under attack by the shorts, or it may be in a sector that is going out of favour, or there may be some other reason that is totally illusive or illogical. In fact, it sure seems like it is going down for no reason at all, and is now at a very low price.
You see it as a great buy, or a gift from the market especially for you.
This situation brings to mind a famous quote attributed to John Maynard Keynes, “The markets can remain irrational a lot longer than you can remain solvent.”
Picking a bottom is just as difficult as picking a top, and while a stock may seem to have fallen to a ridiculously low level, it just doesn’t make sense to go “all in” or buy a full position in a steadily declining stock. If you really feel a stock is at or near a bottom, the best thing to do is put your toe in and begin a dollar cost averaging program with that stock, or wait until the trend has clearly turned.
You may not have as good a result as if you were to buy the full position at the bottom, but you will have protected yourself from losing a lot of money if what you thought was the bottom turns out to be “the middle.”
8. Waiting For A Stock To “Come Back” Before Selling It
It has happened to everyone. You did your homework, you found a great stock, and almost immediately after you bought it, some unexpected news came out and the stock dropped.
Additionally, the new information has changed the fundamentals to where they no longer meet the investment criteria that you used to select it in the first place. You know that you have to get rid of the stock and move on. . . but your inclination is to hold onto the stock until it at least comes back to where you bought it.
Then you won’t feel so bad. Face it, where you bought it is irrelevant. The relevant question is, “Is the money dedicated to that stock being utilized to the best advantage, and is it invested according to your criteria and your risk tolerance? If it is still the best place for that money, then fine, keep it there. But if there are better places for that money, equities that are more likely to “get your money back” then it is time to bite the bullet, sell the stock, and move on.
Waiting for a stock to come back can be a torturous and frustrating experience. Related to “falling in love with a stock,” hanging on and waiting to get your money back may feel right emotionally, but from a financial standpoint, simply doesn’t make sense.
9. Following Unsubstantiated Advice
We’ve all been there. You get a “hot tip” from a friend, an acquaintance, a business associate, a relative, a taxi driver. . . it really makes no difference who it is from. Even if the tip is from your broker or financial adviser, it is always best to check it out for yourself.
Does the equity meet your own specific criteria and tolerance for risk? What do the fundamentals say? What has the trend been? How is it doing versus other like companies in the same sector? In other words, never take anyone’s advice regarding the purchase of a stock without doing your due diligence. After all, no one cares more about your money than you do!
Remember, establish investment criteria based on your financial needs, your age, your tolerance for risk, and the amount of money that you have to invest. Do your due diligence regarding any specific stock. Track your portfolio on a regular basis to determine if your investment choices are meeting your objectives, and finally don’t be afraid to make midstream adjustments when a particular stock is failing to perform. If you do these things, and avoid the pitfalls listed above you will be way ahead of the curve.
Summary
There are a lot of investing mistakes that can be made when your first starting out as an investor. Many more than than the ones I have listed above. However, if you do take the above investing rules onboard, then you should come out ahead of a lot of other beginners that are also just getting started.
However, many new investors will have to make their own mistakes as that’s the best way of learning. I just hope that the mistakes aren’t so bad that the person is able to recover financially.
If you are a beginner investor, then I encourage you increase your financial literacy before you dive into the market. There is so many timeless lessons out there that are still relevant.
Do you have any other beginner investing mistakes that you have made? i would love to hear more in the comments down below….
This was just one of many investing ideas that we have for you. If you want to find out other ways to invest, check out our list of additional investment ideas.
