How many times have you found yourself making investing mistakes? One could say investment wisdom comes from the mistakes we make. Yet it is far less expensive to learn from other people's bad mistakes than our own.
Here are three mistakes investors should watch out for.
Following the herd
The market is a big auction house for stocks. As such, auctions drive emotions, like the thrill of competing and winning or the fear of missing out. If a stock rises suddenly, investors are attracted, but does that make it a better buy now? Likewise, taking stock tips from people like your uncle Barry might not be helpful if your good old uncle buys stocks like he plays the ponies. Doing your own research and buying the stocks that make business sense is the best solution to this mistake.
Confidence in your own judgement is stronger than your objective accuracy
Sometimes when we find interesting stocks, we make the decision to buy them first, then build the reasoning for the purchase. We keep the reasons that support the buy and ignore the ones that stand against it. Investors may actually make better decisions if they first assume buying some stock is a mistake and then find reasons that show it is a correct choice.
Thinking more about a price gain than value
We've all experienced this- a wonderful company is expected to double earnings in the next couple of years and we want a piece of it. Problem is that everyone else has already jumped on board and now the share price is overinflated. The stock could go up from there, yet now you have to pay a premium for future growth. Any gains you make may be small and you have exposed yourself to a price fall if things don't turn out as expected.
Ask the investors of Sirtex Medical Limited (ASX: SRX) who bought after the stock was already trading at close to 60 times earnings. A disappointing clinical trial result came out recently and the stock plummeted from $39 to about $15 in one day. Sirtex Medical is a good company and is still expected to grow well – just not as much as traders had hoped.
Investors could follow the three stocks below, but remember to do your own investigating before you pull the buy trigger.
G8 Education Ltd (ASX: GEM), the childcare centre operator, is expanding its centre network at a fast clip and earnings are growing from recent acquisitions. The stock yields 6.9% fully franked. There is a lot of room to grow across Australia still, so you should watch this company.
CSL Limited (ASX: CSL) is the largest ASX-listed biopharmaceutical and operates internationally, producing blood-related medical supplies which are in high demand from hospitals. Analysts expect the healthcare company to raise earnings around 20% annually for the next two years and dividends could grow similarly. CSL stock yields 1.5% unfranked.
SEEK Limited (ASX: SEK), the operator of the leading job placement website seek.com.au, has a wide lead in market share over its Australian competitors and is becoming a bigger regional player in Asia. The company is expected to increase earnings in the double digits, so having this fast grower in your portfolio could give you pleasing returns.
