Common Mistakes in Investing
Common Mistakes In Investing
Investing in stocks is very hard, but at the same time simple to understand. As Munger says
“It is simple, not easy ". There are a lot of things that go wrong when people try to invest in stocks. Why do people lose money on stocks? Let’s see the most common mistakes in investing.
Common mistakes people make in the stock market:
1. Making quick money: One of the most common misconceptions of the market is that people can make money fast. People want to get rich fast but that is not how the world works. Building wealth takes a lot of time and effort and the market is not a place where you can turn your fortunes around very quickly.
2. Thinking of companies as stocks: Another mistake investors make is that they think of companies on the market as stocks. They see charts of the stock price and make predictions of the stock price. A smart investor sees stock markets as a medium to invest in a good business which can earn more money in the future and can be bought at a cheap valuation compared to its intrinsic value.
3. FOMO: Investors during trends have a fear of missing out on the short-term trends that take place. They fear that they will miss out on an opportunity that arises but, in reality, it is a fad. For example, everyone invested in crypto recently because it was “the next big thing” but then the bubble burst and people lost their money.
4. Listening to brokers: If you understand incentives very well it is common sense that a broker is not trying to make you money he is trying to make money off you. A broker's main aim is to sell more stocks so he gets more commission he does not have any incentive for you to make profits on that investment as he does not get any commission if you do make a profit. As Warren Buffet says “Never ask a barber if you need a haircut.”
5. Constantly taking action: Something very important for an investor is the art of being patient. Not buying something for a long time doesn’t mean it is a bad thing. It takes a long time to find a great investment as it is not very common. So when you do find one you take action but until you find a company that doesn’t fit your criteria of a good investment you have to keep reading and researching. After you find this business all you have to do is buy it and sit on your ass and read and research more and not overreact to the market frenzies. Warren Buffet has compared this to the baseball pitch where he said "If you don't like the pitch don't swing. You can stand at the plate, with the bat on the shoulder doing nothing but waiting ... for the perfect pitch."
6. Timing the market: If you go around looking at companies and try to buy them at their cheapest possible price and sell at the highest one let me give you a disclaimer it is not going to happen. It is not possible to predict what the market will do as it is very complex and it is also kind of like predicting the future. The uncertainties that exist are the reason that this is not possible. This is likely a cause for you to lose money
7. Not understanding the business: As I said before people usually have a mindset of investing in stocks causing them to focus on stocks instead of the underlying company. This also causes people to invest in companies which they do not understand but invest in because of some stock tip, price, frenzy or many more short-term factors irrelevant to the business and its understanding. They don't do their research properly and invest in companies outside their circle of competence.
8. Focusing on outcomes instead of results: Investors generally only care about what their returns are going to look like and they look at estimates because of this. Once they see estimates of their returns they do not see the underlying problems that exist or simply put they don’t do their research. This causes them to have no conviction as they have no reason to stick to the investment if it goes bad in the short term.
9. Not selling when the fundamentals change: Investors are humans and they tend to make mistakes. So if you make a mistake in your investment and there is a change in the fundamentals of the business which makes it a bad investment you should sell it instead of holding on to it when you know you have made a mistake. Keep track of the companies you have bought and see if you were wrong in your judgement of the management, balance sheet, the moat, etc.
10. No idea what to invest in: If you are an investor who has no idea what he wants to invest in or what you are looking for, you shouldn’t invest in individual stocks. One of the most important things in investing in individual companies you have to know your circle of competence, you have to know what your aptitude for risk is and how you are going to approach investing. Joel Greenblatt says “Choosing individual stocks without any idea of what you're looking for is like running through a dynamite factory with a burning match. You may live, but you're still an idiot.”
These are a few checklist points for investors to NOT do. Hopefully, this helps in investing in stocks as this might give an idea of which companies you don't invest in and as Munger has said "invert, always invert." knowing what you don't have to do is an immense help.