Investors are prone to making mistakes. Whether it be an individual buying shares for the very first time, a ‘trader’ who buys and sells shares multiple times a day, or a seasoned long-term investor who has been analysing businesses for five decades ? none of us are free from the occasional blunder.
Some of these mistakes will prove costly. The mistake may involve buying a share that is overvalued or destined to fail, or it could involve not buying shares of a business that goes on to thrive. These are just two examples of errors that every investor is bound to make…
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Investors are prone to making mistakes. Whether it be an individual buying shares for the very first time, a ‘trader’ who buys and sells shares multiple times a day, or a seasoned long-term investor who has been analysing businesses for five decades – none of us are free from the occasional blunder.
Some of these mistakes will prove costly. The mistake may involve buying a share that is overvalued or destined to fail, or it could involve not buying shares of a business that goes on to thrive. These are just two examples of errors that every investor is bound to make sometime along their journey.
But there are some mistakes that you can avoid, by learning from those who have made them in the past.
Here, then, are three top (avoidable) investing mistakes that investors tend to make which will hopefully save you some losses and heartache along the way.
1. Frequently taking profits
When you see your shares make a strong gain, it can be awfully tempting to sell and lock in a profit. While that may seem logical, there can be huge consequences as far as brokerage charges and taxes are concerned.
Brokerage charges can add up if you buy and sell too frequently, to the point where they can shave a few percentage points off your total gains. It mightn’t seem like much, but the difference can be staggering over time.
The capital gains taxes charged on sold shares can be crippling as well. In Australia, however, those capital gains taxes are halved when you hold onto the shares for more than 12 months, which can save you thousands of dollars every year depending on the size of your portfolio.
2. Cut the flowers and water the weeds
To continue on from the previous point, investors are often inclined to trim their winners and add to their losers in order to reduce the average buy-in price. I’ve done it myself, only to watch those winners climb higher and higher.
The lesson here is that winners often keep winning while losers often continue to lose. That won’t always be the case, but the key is to focus on the business rather than the share price.
Sure, if the share price becomes ridiculously overvalued then it may be worth selling, but if the shares have simply risen in price and the business is still performing strongly, then it’s probably worth holding on. Corporate Travel Management Ltd (ASX: CTD) is a great example: the business has continued to grow and its shares have simply followed it higher. This has generated huge gains for those investors who held on for the journey.
3. Ignoring boring companies
Finding a complex company can seem exciting at first, but it can be extremely difficult to keep up with the jargon used in their annual reports, making it easy to get bamboozled or overly trusting of management.
I recently sold my shares in 1-Page Ltd (ASX: 1PG) for this reason (among others). Time may yet prove that I made the wrong decision in selling, but what seemed like an exciting company is still making minimal revenue and cash inflows. So, I decided to cut my losses.
By comparison, many investors feel less inclined to invest in a boring old company like Washington H. Soul Pattinson and Co. Ltd (ASX: SOL). It buys and holds businesses for the ultra-long term, much like Warren Buffett’s Berkshire Hathaway investment conglomerate in the United States, making exciting updates from the company a rare occurrence.
But boring is often beautiful in the investing game. The company has managed to increase its dividends every year for the last 15 years at a cumulative annual growth rate of 11.3% per annum, while it has also generated significantly greater returns than the All Ordinaries Accumulation Index (which includes the impact of dividends). Not bad for a 130-year-old company!
We've just looked out some of the common mistakes that investors make. Now, discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.
The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Berkshire Hathaway (B shares). Motley Fool contributor Ryan Newman has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.