It’s natural for many investors to focus on their recent wins and good investment decisions that they made.
On the other hand, it is rare for investors to put their mistakes up for scrutiny.
However, it’s only through the admission of errors that we can learn from them.
The good thing is that you don’t need to make these blunders yourself to learn from them.
Learning from missteps made by others can be an effective way to improve yourself as an investor over time.
Here are five investing mistakes that are commonly seen and should be avoided at all costs.
1. Trading too often
It’s tempting to want to try and maximise your gains when investing.
When investors see a hot stock shooting up, there is an urge to jump on the bandwagon to capture some of those quick gains.
If the stock does continue to go up, they lock in a profit and move on.
Should the stock decline, the automatic reaction is to cut your losses and look for another potential winner.
This mentality can best be described as a “trading” one and results in excessive brokerage fees and commissions.
These expenses accumulate over time, eroding the gains you attained while exacerbating your losses.
The mistake of trading too often is committed by investors who are impatient and think that they know more than they do about share prices.
The way to conquer this error is to shut off your screen and carry on with life.
If the company you invested in is a strong and resilient one, then you should feel comfortable owning it over the long-term.
Trading too often will leave you feeling stressed out, and likely poorer as well.
2. Waiting too long
There is a tendency to watch and wait while we plan our moves in the stock market.
The reasons are varied: you may need to conduct more research on a company, the market may be poised to fall further, or you’re waiting for a catalyst to be confirmed before committing your capital.
Whatever the reason may be, you end up waiting.
And waiting.
The result is that your capital stays idle while the earnings and cash flow of great companies continue to power on.
The mistake of waiting too long leaves you with a pile of cash that’s continually being eroded by inflation.
Rather than waiting, it’s advisable to pace your purchases to gain some exposure to good stocks that pay healthy dividends.
3. Buying value traps
Investors are often attracted to stocks that are cheap based on traditional valuation metrics such as the price to book or price to earnings ratio.
There’s nothing wrong with using such metrics as a starting point in your search for investment bargains.
However, do note that the bargain bin will have two kinds of cheap companies.
Some companies may be cheap due to a temporary but reversible fall in earnings, possibly due to factors such as the COVID-19 pandemic.
On the other hand, the second category contains companies that are justifiably cheap because of flawed business models or a permanent erosion in the business’ competitive edge.
The latter group are known as “value traps” and are to be avoided as they will not only erode your hard-earned capital but also suck up precious resources that could be deployed to better businesses.
4. Panicking
It’s normal to panic when something goes wrong in life.
After all, panicking is a human reaction that helps the brain to recognise the danger to trigger a “fight or flight” response.
However, when it comes to investing, panicking can be extremely hazardous to your wealth.
There will be times when your investments suffer unexpected bad news.
It could be a profit warning, a lawsuit or even the loss of a significant contract.
Such an event would cause the share price to tank as investors sell out in droves.
The first instinct is to follow suit and dump your shares to avoid the pain of seeing them plunging.
It’s advisable, though, to think through the implications of the event first before reacting emotionally.
If the incident does not violate your investment thesis, it could even be a chance to accumulate more shares on the cheap.
5. Acting on hot tips
One of the worst things you can do is to act on rumours or “hot tips”.
This behaviour can be likened to walking into a casino and plonking money down on a slot machine.
Rather than engaging in mindless chatter on the next hot stock or wasting time sifting through unsubstantiated news, you should spend time properly researching the businesses you wish to own.
You should avoid gambling recklessly with your capital.
Instead, go about investing in a calm, rational manner.
Benjamin Graham, the father of value investing, mentioned that “investing is most intelligent when it is most business-like”.
By adopting a serious mindset towards investing, you are one step closer to achieving your investment goals.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.