Even the best investors make mistakes every now and then. The more mortal of us make mistakes relatively frequently and minimising those mistakes are key to achieving long-term success in the sharemarket. I've made plenty of mistakes so far in my investing journey but learning from them is key and I do find that I make less mistakes now than I did a couple of years ago.
Here are four common mistakes made by investors:
Selling To Lock in a Profit
Have you sold a company because you've seen a quick 20% rise in the share price and want to lock in your profits? Did that company then go on to higher and higher highs and you ended up kicking yourself?
Some investors (like myself unfortunately) sold out of the banks in mid-2013 after a spectacular run from mid-2012. As we all know they've now run onto much higher highs and paid out many millions in dividends. Be careful to check how reliable earnings growth is and whether your original purchase assumptions still hold before selling!
Selling to Minimise a Loss
If the reason why you bought a stock has changed significantly for the worse, then definitely sell up, but if conditions haven't materially changed and the market just doesn't agree with you, it's sometimes best to hold onto those losses. Selling Macquarie Group Ltd (ASX: MQG) or Woodside Petroleum Limited (ASX: WPL) in 2011 when they were out of favour with investors would have been a huge mistake, even if you were sitting on paper losses of 20+%.
Holding on in hope of a Rebound
The other side of the coin is that conditions may have materially changed but you hang in there in the hope that it'll all get better soon. Examples of this include Newcrest Mining Limited (ASX: NCM) and Lynas Corporation Limited (ASX: LYC) which have been huge disappointments over the past 12 months and show no tangible signs of improving anytime soon.
Failing to Lock in Profits Above Fair Value
Finally, investors should always have a price in mind that they would sell a stock. If the market gets overexcited and offers you a price for a company that is well above what you value it at, you are often better off taking the opportunity. A recent example of this is QBE Insurance Group Ltd (ASX: QBE) which was selling for $17.53 in August 2013 despite consensus estimates pointing to an (relatively) excessive price to earnings ratio. When the company failed to deliver the results the share price sank to $10.
