“Success does not consist in never making mistakes but in never making the same one a second time.” – George Bernard Shaw
To be a successful investor one needs to learn from mistakes, either you can learn from mistakes that you have made or mistakes of others. Mistakes in investing can be very costly, hence it is wise to avoid common pitfalls of beginners and shorten the learning curve. Here I’ve compiled a list of 7 common mistakes to avoid:
Buying on tips
This is very common among retail investors, people tend to take advice from brokers, financial advisers or a stock market “guru”. It’s always entertaining to listen to these professionals pitching “the next big thing”, often they tend to paint an over optimistic picture of a stock.
Not having an investment framework
A framework keeps you in check and ensures that you don’t deviate from a strategy. It is a thought process that helps you make informed decisions on investments. A proper framework should include a strategy to enter and exit investments, it has to be well-defined yet simple to understand.
Not having self-discipline
Well, its pointless to create a strategy but not having discipline to execute it. Discipline is key in becoming a successful investor. There are times where you will be tempted to speculate on stocks for a quick buck, but this behavior is detrimental in achieving consistent long-term returns.
Over leveraging/ Contra trading
Leverage is a double-edged sword; it can help you increase returns however, it can also destroy your account overnight. The worst thing a beginner investor could do is to use too much margin in the early stages of the learning curve. Being over leverage also leads to becoming emotionally attached with a stock, you would then spend too much time monitoring its daily price fluctuations.
Buying stocks that appear cheap
Just because a stock is 20% cheaper than a month ago doesn’t mean that it is a cheap stock. Value is relative, and value has to be based on the fundamentals of the business. Investors should know basic valuation methods to avoid falling into this trap.
Keeping losers and cutting winners
“It’s not whether you’re right or wrong, but how much money you make when you’re right and how much you lose when you’re wrong.” George Soros
Know when you’re wrong, admit it and get out ! Don’t hold on to a stock in hopes that it will come back to breakeven, salvage the remaining capital and move on.
Not investing in yourself
“An investment in knowledge pays the best interest.” Benjamin Franklin
Engage in life long learning, the world is ever-changing and we have to learn to adapt. Commit time to learn new things about deep value investing everyday. Read more about businesses and the factors affecting them.If you think paying for education is expensive, try ignorance.