The Motley Fool

3 common investing mistakes to avoid

A lot of people see the share market as a bit of a lottery, where it’s possible to buy one stock that turns you into a millionaire, while plenty of other stocks sink in value and destroy capital.

In fact much of the cynicism is due to the common belief that you need to be a professional stock broker or insider to know what stocks to buy and sell. 

This is untrue though as while successful share market investing isn’t easy, there are plenty of surprisingly simple rules to follow for anyone looking to improve their chances of beating the market.

In fact I reckon just following these three rules alone is much more likely than not to improve anyone’s investing returns.  

1) Not controlling your emotions – it’s easy to slam the ‘sell’ button on shares as money is an emotive business that can bring out the worst in people. If a share you bought falls in value over a number of days, but not because of any specific news, it’s easy to decide you’ve had enough and hit the sell button. 

But consider how two investors could buy the same stock on the same day for the same price, yet one make a 20% loss and the other a 100% gain. The difference is that the latter has learned not to let the share market control their emotions, rather they control their investments through a rational long-term focus on the business. 

2) Selling too early  “you won’t go broke taking profits in the share market” is a popular adage, most commonly popularised by brokers who earn fees every time you buy or sell shares with them.

Selling too early is also one of the commonest mistakes made by beginner investors. However, if you take a long term approach to investing you’ll understand that selling winners early is probably the most egregious investing mistake of them all. This is because riding huge winners over the long term is the best way to deliver market-beating returns. 

3) Speculating – share markets globally are packed with companies more interested in taking and spending your capital than their own share price or actually building a profitable business over the long term.

In fact when you remember that share markets have two primary functions in 1) providing a platform for trading shares 2) providing a platform for companies to raise and spend your capital, it should not come as a surprise that a lot of companies just blow up capital and never produce a profit. That’s partly why share markets exist. However, if you aim to avoid these companies (the obvious clues are that they have little to no revenue or profit) you will almost certainly improve your returns. 

Foolish takeaway

If you just remember these rules and take a long term approach in only buying strong companies I reckon you’ll have a good chance of improving your share market returns.

Two famous companies I’d happily buy today are Apple and Facebook, while for anyone looking closer to home the healthcare sector is a good bet for long-term growth.

In particular the likes of ResMed Inc. (ASX: RMD) and CSL Limited (ASX: CSL) have great track records, although I should note I’d probably rate both these businesses as holds today on valuation grounds.

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Tom Richardson owns shares of Apple, CSL Ltd., Facebook, and ResMed Inc.

You can find Tom on Twitter @tommyr345

Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors.The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of and recommends Apple and Facebook. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd and has the following options: long January 2020 $150 calls on Apple and short January 2020 $155 calls on Apple. The Motley Fool Australia has recommended Apple, Facebook, and ResMed Inc. 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 Scott Phillips.

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