Avoiding common investing and trading pitfalls is crucial. Here are some typical investing errors you should try to avoid.
Warren Buffett wisely cautions against investing in businesses that are not well understood. It is crucial to have a deep understanding of the company, its market sector, the broader industry, and its financial stability before committing to an investment.
Understand your investment
Take time to research whether it be a company, fund, unit trust or savings account. Make sure you understand what you are doing. Not understanding the investment is a massive failing.
Love the company, but resist falling in love with it. An emotional attachment to a specific stock can obscure your judgement. Keep in mind that investing should be a process of making rational decisions based on data, not on personal emotions.
Patience
Successful investing demands patience. Don’t anticipate immediate results; give your investments the necessary time to mature. Resist the urge to frequently check the markets and make hasty uninformed decisions.
Investment turnover
Excessive trading, known as churning, can result in significant transaction fees and tax consequences. It is advisable to adopt a long-term investment strategy and minimize superfluous trades.
Attempting to time the market
Consistently timing the market is a difficult task. Instead, the emphasis should be on the duration of market involvement. Steady contributions and maintaining investments yield benefits in the long-term.
Getting even
Clinging to underperforming investments with the hope of just breaking even can be harmful. It’s crucial to assess each investment on its own merits and be prepared to take losses when needed. Run the winners!
Diversify
Investing all your funds in a single stock or asset class heightens the risk. Mitigate this by diversifying your investments across various asset types, industries, sectors and regions.
Cut emotions
Fear and greed often result in unwise decisions. It’s crucial to remain disciplined, adhere to your investment plan, and resist the urge to make hasty decisions driven by emotions.
You
Always maintain honesty with yourself when investing. Do not persuade yourself of anything other than the FACTS regarding your investment choices!
Keep in mind that investing is a journey where learning from mistakes is an integral part of the experience. By steering clear of these common pitfalls, you’ll set yourself up for greater long-term success.
Spread out your investments. Diversify. Aim for the long term. Remove emotion. Let the winners run. And doe your RESEARCH!
Warren Buffett, renowned as one of history’s most successful investors, has imparted invaluable insights that can help steer you on your investment path.
Rule No. 1 is never lose money. Rule No. 2 is never forget Rule No. 1
This straightforward statement has significant connotations. Although the aim of investing is to make a profit, it is just as important to avoid losses.
By reducing choices that put your portfolio at risk, you enhance the chance of earning profits. Consider it protecting your capital before pursuing returns. In contrast to those who gamble on the stock market, Buffett prioritizes careful risk management.
It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price
Rather than concentrating only on low-priced stocks, it’s wise to invest in outstanding companies with robust economic foundations and competitive edges. Although top-notch companies seldom seem inexpensive, their enduring profitability may warrant a fair premium. Notable firms that Buffett has backed include Apple, American Express, Coca-Cola.
Opportunities come infrequently. When it rains gold, put out the bucket, not the thimble
Be ready to grasp opportunities as they come. Instead of a small thimble, arm yourself with a bucket to gather the metaphorical riches. That is, capitalize on favorable market conditions and make smart investments when suitable chances emerge.
Invest in yourself
Buffett advocates for self-improvement, highlighting the importance of effective communication, both written and verbal. Developing this skill can greatly enhance your value.
Diversify
Diversify your investments among various assets to mitigate risk. Look into index funds and exchange-traded funds (ETFs) – unit trusts, stocks and shares, gold and hold cash to achieve widespread diversification.
Start early
The effectiveness of compounding is maximized when you start investing early. Being consistently invested over time is more beneficial than attempting to predict market movements.
Automate
Establish automatic contributions to your investment accounts. Regular investments over time can result in significant growth.
The principles that capture the influence of fear and greed on investing were articulated by Warren Buffett.
Buffet advises: ‘Be fearful when others are greedy, and greedy only when others are fearful.‘
Fear and Greed
Fear
When investors collectively succumb to fear from ongoing stock market declines, they often resort to selling their shares, which in turn exacerbates the fall in prices.
Greed
In bull markets, it’s common for investors to exhibit excessive greed, pursuing rapid wealth and speculative trends.
Buffett’s wisdom
Warren Buffett, often referred to as the ‘Oracle of Omaha’, is known for his disciplined, long-term approach to investing. He specializes in value investing, which involves purchasing companies that seem to be undervalued by the market.
The rule
When others exhibit greed (buying aggressively), it’s prudent to exercise caution. On the flip side, when others are fearful (selling in a panic), it may be an opportune time to be greedy (buying at reduced prices).
Application
Fearful times
In times when fear prevails in the market, prices might plummet as a result of panic selling. Buffett advises exercising caution in these situations.
Greedy times
When others display excessive optimism (greed), it presents an opportunity to acquire undervalued assets.
Successful investing requires maintaining balance, adhering to fundamental principles, and steering clear of emotional extremes.
Investing is a marathon, not a sprint; hence, patience, discipline, and ongoing education are crucial.
Remember… ALWAYS do your own careful research! Or better still, take professional financial advice. Actually – just do both!
RESEARCH! RESEARCH! RESEARCH!
Disclaimer: this article is for informative purposes only! Do not trade nor invest unless you FULLY understand what you are doing – even then it is wise to take qualified financial advice.
The idea is simple – pick good companies and hold them for the long-term.
Every time you buy shares in a company, you have purchased a piece of that company. And as a share owner, you are entitled to a ‘share’ of the profits.
When it comes to investing, the goal is to find great companies, super companies. Buy shares in these companies at good prices. And then behave like owners of these companies and enjoy all of the successes.
Then… HOLD those shares for as long as possible – as if you own the company.
Ask yourself this question: ‘Would you buy the company?’
If the answer is yes – then go buy the shares.
Holding on as long as possible means that as long as you believe a company is still a great, you are more likely to keep the shares. But if something changes and it’s no longer a good choice, then it may be time to sell up.
The message here is to believe in a long-term investing strategy – because it works!
Short-Term versus Long-Term Investing
What you must not do is gamble on shares or any other high-risk activity or product. Share prices go up and they go down all the time. And in some cases, prices continue to move even after the stock market has closed!
Long term investing is a long-term winner!
Most people aren’t successful trying to ‘bet’ on when a share is going to go up or down especially short-term bets laced over minutes, hours, days or weeks. You can’t build wealth this way. In fact, there are plenty of traders out there with tragic stories to tell of failed ‘dumb money bets’. This is one of the fastest ways to lose your hard-earned cash; just don’t do it!
Platforms
There are many investing platforms available today that offer all sorts of trading solutions, from day trading, CFDs (contract for differences), spread betting, and more recently, cryptocurrencies. These instruments aren’t really designed to assist a long-term strategy but rather a short-term punt or bet. It’s an endless game where someone, somewhere is always left with nothing. These systems will happily take your money.
Please read the small print for these services. Do not be surprised to see disclosures that read something like, ‘75%+ of retail traders lose money’. It’s true, they do, and it could be you! Its far far easier to learn to become financially successful over the long term.
Long-Term Investing
Diversify
A hard truth about investing is that sometimes you’ll get it wrong, we all do.
The term for this is firm-specific risk (sometimes referred to as unsystematic risk). And every company in the world, even industry behemoths like Amazon, Apple or Microsoft get it wrong sometimes too. It’s unavoidable.
Fortunately, such risk can be mitigated through diversification. By owning a number of companies, the returns of one successful investment can easily offset the losses of several losers.
It is wise to aim to build a portfolio over time of around say 10 – 20 quality businesses that you believe in. If you would be prepared to ‘buy’ the company; buying shares in it is the next best option.
Have Patience
In the short term, the movements of the stock market are chaotic, unpredictable or volatile even. But over a longer period of time, a recurring pattern starts to emerge among quality businesses.
Select quality companies and hold them!
Companies can’t magically double their profits overnight. Building a massive multi-billion or even trillion-pound enterprise takes time. But the investors who have the patience and financial prudence to invest in quality businesses with such long-term potential can unlock enormous wealth.
Invest consistently
Getting started with investing is the first major step. The second is to keep investing over time. Little and often. It’s not easy to ‘free up’ cash but the more money you put to work by investing in stocks, the better your portfolio will do overall.
It is easy for me to suggest for you to go invest and spend your money, you most likely need the money spare to be able to go do this in the first place. So, a little invested spread over time will help open that ‘wealth’ door as time trickles by.
However, there is a caveat to this rule. You should only invest money you don’t need to live. Invest only what you have spare or can ‘free up’.
This is the way!
Long-term investing requires holding investments for years or even decades. This strategy works – this is the way! It’s easier said than done, but a little invested now will go a long way later. It’s also a matter of priorities and sacrifice to ‘free up’ some spare cash to invest instead of buying that new must have gadget (that you don’t really need).
Also, the last place you want to find yourself in is where you are forced to sell your investment before it’s had time to ‘climb’ because you’re short on cash. Or even worse, forced to sell your holding during a stock market crash when prices are extremely low. That’s an awful place to be – don’t go there if you can avoid it. However, buying after a crash is a different matter – but again, buy only good quality companies.
Select super good companies and hold them.
In short, invest consistently. But only the money you can afford. Don’t borrow, don’t use credit. Only invest what you can afford. It will work for you over time. But invest wisely in good high quality comapnies,
Don’t panic – volatility happens!
The stock market will crash; this is an inevitable fact of investing. Naive investors, who panic during these volatile times, often end up selling their shares that are either completely unaffected by the catalysts of the crash or perfectly capable of weathering the storm.
Just take a look at what happened with Applein 2008. The tech giant fell by over 50% in the space of 12 months despite having no exposure to the U.S. housing market – even Apple got caught up in the sub-prime lending fiasco. And while the subsequent recession did impact sales, recessions, just like stock market crashes, are temporary. Apple share price recovered, as did many other top-notch companies too.
As horrible a stock market crash is, this is actually one of the best times to buy shares, especially when investing for the long-term. And these opportunities only come around once a decade or so. So, don’t miss out on these incredible opportunities to buy fantastic businesses at major discounts if you have the cash spare.
Let your winners run
Portfolio management is something every investor has to do. Yet a common mistake, is to sell shares in thriving companies too soon. This is usually an error – bear in mind that winners have a tendency to keep winning! But I get that – I understand you may want to sell as you need the money or want some of your investment back. Try and hold if you can – but not at any odds. Keep a close eye on the market – sentiment will change and that will alter the markets direction.
Let the winners run!
Having said that, there is an exception. It’s perfectly possible for a company that was just 2% of your portfolio to grow to 20% or even higher. In these scenarios, it can be wise to sell a few shares to reduce the risk of being over-exposed to a single investment.
But otherwise, let your winners win. LET THE WINNERS RUN!
You can do it!
There is no such thing as risk-free investing, even with a long-term approach. But many of these risk factors can be mitigated through strategies like diversification. Try and manage your portfolio, add stop losses and follow your investments through the newswires.
Remember to always do your research! No short cuts!
