Investing is often seen as a highly complicated endeavour, reserved for cigar-smoking millionaires or sweaty men yelling on the floor of a stock exchange. The reality is that investing is hard, but not overly complicated – you just need practice and perspective.
Sure, there is a lot of jargon and a lexicon of funny sounding words. But these are often propagated by many in the financial services industry, who would prefer it if ordinary folks were kept in the dark about investing, leaving it to fee-sucking ‘professionals’.
But many people who do try and give investing a go are often put off by a single mistake that loses them money. This is very common but also unfortunate – because those who do get cold feet are missing out on a path to a stable and secure financial future.
So I always say the best way to learn good investing habits is by losing money, and the second best way (less effective but far more pleasant) is by learning from other peoples’ mistakes.
So here are five common investing mistakes that you might be in danger of making (if you haven’t already). This writer has personally made many of them, so learning from his mistakes might help your confidence a little!
1. Timing the market
This is probably the most common mistake out there, but also one of the worst. The idea of timing the market often crops its ugly head up when new investors first get their head around what stock market investing looks like
Looking at a pricing chart, the peaks and troughs of a stock price or index are so obvious in hindsight, you might just think ‘if I bought then and sold there, I would be rich!’
No, no and no.
No one, I repeat, no one knows when a price has found its top or bottom before it happens. There’s an old saying that ‘time in the market beats timing the market’ and it’s true every time. The only instance where timing the market should occur, is selling a stock that’s overvalued or buying a stock that’s undervalued.
2. Mistaking price for value
This is similar to mistake number one. Efficient market theory (a popular school of thought accepted by many investors) teaches that the market is always efficient. This (in my opinion) is not the case all of the time. Investors often act emotionally, driven by fear or greed, especially if the market is booming or collapsing.
Did the GFC affect the ability of Woolworth Group Ltd (ASX: WOW) to sell us cheap groceries that we all need for living?
Not really. That didn’t stop its share price tanking 32% in 2008.
Warren Buffett – one of the greatest investors of all-time – has said that ‘price is what you pay, and value is what you get’. Understanding the difference might mean you become a more successful investor.
3. Buying things you don’t understand or investing emotionally
Here is perhaps the biggest mistake that young investors make. Investing in lithium miners, biotech companies or other futuristic sounding investments might sound like you’re seizing a changing world.
But if you don’t totally and completely understand what a company is doing and how it will (not might) make its money ten years down the road, you are gambling and not investing.
Similarly, if you absolutely love a company because it’s ‘changing the world for the better’ or even if it’s just your favourite shop of all time, it’s not enough to make it a good investment. Rather, you should look at it as your first step (of many) in analysing the company in question.
4. Diversifying for the sake of diversification
Diversification is one of those words you will hear endlessly if you’ve started on your investing journey. While I do think there is a lot of merit in not putting your eggs in one basket, there is also lots of merit in not having a thousand baskets. Just because you might have shares in Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP), doesn’t mean you have to balance it out with a retailer like Woolworths or JB Hi-Fi Ltd (ASX: JBH).
Understanding your investments, including what the potential downsides your companies might face, is far better than buying as many companies in as many industries as you can
After all, most of the world’s richest people – people like Mark Zuckerberg, Elon Musk, Jeff Bezos and Warren Buffett – only own one stock. They just know and understand everything they need to about that single investment.
5. Buying high and selling low
This is the worst mistake you can make in investing. It involves letting your emotions get the better of you and most investors have made it. Everyone knows that successful investing revolves around ‘buying low and selling high’. But that’s exactly the opposite of what many investors do a lot of the time.
If a stock is going berserk and climbing 10% every week – many out there will feel the need to ‘jump in’ and make a quick buck (before the market turns, of course – see mistake number one), but in reality, this is ‘buying high’.
But more commonly, most investors will get spooked if the market crashes by 20%, 30% or 40%, and sell out of their shares ‘before the bottom’ but in reality, at a ‘low’ (again, see mistake number one).
Both of these actions are emotional (greedy or fearful) and it WILL lose you money if you make a habit of it.
Investing in shares means accepting that the market is a volatile beast, and you will from time to time see big changes in the value of your portfolio. A market crash is an opportunity to buy shares at a discount, not to sell them at a loss.
There you have it, five common investing mistakes. I hope that discussing these potential slip-ups can make you a better investor, as reading about them is a lot better than learning first hand! All are unfortunately prevalent, but also equally avoidable with experience – so best of luck!
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Motley Fool contributor Sebastian Bowen has no position in any of the 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 Scott Phillips.