Avoid 6 investing sins to improve your portfolio results by avoiding errors and missed opportunities. Errors of investing on news or turnarounds without research, holding losers or averaging down and not paying attention have big costs.
What common mistakes should investors avoid?
Choices To Make Money Work course 215 lesson 6, answers the question, what common mistakes should investors avoid? At the end of the lesson, links to related content help you learn more.
What you learn:
This lesson covers 6 common avoidable errors that harm investors. Investing on news without doing homework or doing no research but holding losing positions or averaging down or betting on turnarounds or investing but not paying attention are all big, costly investing mistakes. Avoiding these investing sins can significantly improve portfolio returns and help build wealth.
Avoid these common mistakes
Dramatically improve investing returns by avoiding this sin list:
6 Common investing sins
1. News only investing = bad news!
2. No research = no results!
3. Holding losers = poor profits
4. Bankrupt buying = sinks money
5. Averaging down = sinking returns
6. Distracted investing = cash crush
The wide-ranging list includes: making investments based only on a media report, investing without research, holding investments that are losers, investing in turnaround or bankrupt companies, averaging down by buying more of a loser, not learning about or paying attention to investments.
These 6 Sins of new investors are mistakes that have the nasty habit of being costly. We must learn about them, avoid them and quickly correct these mistakes should we make them. If you fall into any of these investing traps, get out as soon as you realize you have committed an investing sin! Rescue your money and get it into a profitable position.
6 Sins of new investors are common errors made by far too many inexperienced investors. However, they have lots of company. Some very experienced investors and far too many financial advisors, that should certainly know better, commit these expensive financial sins!
1. News only investing = bad news!
Event or news only investing = bad news! The first of the 6 sins of new investors: investing based only on a news story. Investing in a company only because of media attention usually produces poor financial returns.
News cycles are short and the stories change daily. Yesterday’s story gets replaced by a new one. News is new. Even a big event story typically fades in under a week.
Events happen, get reported and pass into history. Most often that happens without having any lasting effect on the value of a specific company.
A business or industry may get positive or negative media coverage, but that usually has little long-term effect on shareholder value. Don’t invest just on news. Find underlying value before investing.
Investing, trading & speculating are different
Learn the differences between investing, trading and speculating. Here we are talking about investing.
If you are investing, take a long view. Check into the background of the company that caught your eye or ear. But also look forward and around. Consider prospects and possibilities for the company and consider the context. Consider how it fits, effects and gets affected by the industry and the economy.
When serving as a CEO, I learned how to get publicity and always welcomed media attention. New investors were often attracted. Publicity was also very good for attracting customers. By attracting media attention and being in the news, more people become aware of the company. Awareness helps make doing business easier.
Generally getting publicity works well for the company involved. My warning here is not to either buy or avoid companies in the news. Rather, it is to never make that the only reason why you buy or sell. Do the homework.
There is money to be made by playing news cycles. But as a trader, or a speculator, not as an investor. In other blog posts we discuss the differences between investing, trading and speculating. We can then go over details of why each requires using different strategies and tactics for success.
2. No research = no results!
Investing without doing your homework or research = blind investing. This second of the 6 sins of new investors: investing without research. If we miss doing our investing homework assignment, we pay by losing money or opportunity.
We must do the research on each investment. Do the research before investing. Yes, I know, I harp on this point. It is so very important. Doing homework is at the very core of investing success. So I say again, do your homework and you can become a superior investor.
Doing your homework can help you get richer
Failing to do the research is a very costly mistake. You can get lucky but you can’t always fake this test. It can put lots of money into your pocket! You can’t possibly find work that pays a higher hourly rate then what you can make for the time spent doing investing homework. Decide to get richer, do your homework!
3. Holding losers = poor profits
Loser holding kill money. The third of the 6 sins of new investors: holding companies that are losers plays the wrong group. Investors ride winners, not losers and need both a long view and patience. But that does not mean you must hold forever.
Sell, when and as soon as you know, that you have a loser. Do not carry a losing stock. Get your money out and bring it back to life by selling losers.
If a stock or the market declines in price, our homework pays off by helping us make good decisions. Being informed about the market and economy, as well as knowing the companies in our portfolio, allows us to make informed decisions to buy, stay or sell.
Doing homework also prepares for price changes. When prices move down we then find ourselves in a good place. We can see if the market is having a short-term emotion driven fit, a dip, a correction or if something more significant has happened or changed. We can be among the earliest to see and correctly react to a downturn.
The market regularly reacts with emotion driven fits. Don’t let the noise, trading action and drama frighten you off.
However, we do need to act when things change. Sell when the facts change to negative. When facts change to create a new negative reality, we must accept that new reality. And immediately sell! We discuss this in greater detail in other posts.
When normal leaves you should too
When the facts go negative, they are not going to get back to “normal”. The changing facts means that the negative picture is the new normal. The old normal is gone and like yesterday, will not come back. Sell, and give the recovered money new life by being ready to invest in your next winner.
Think of our job as investors as a simple one. We invest to make our money grow, to make more money for us. We do not invest to support or be the fan of any company.
Rather we are the biggest fan of our money! Investing well means putting it to work doing what it should do. Bringing more money home to you!
4. Bankrupt buying = sinks money
Avoid the turnaround money coma of waiting for a troubled company to turnaround and produce bottom line. This not a good investment strategy. That approach kills money or at the very best, can put it in a coma. Don’t let your money die or sleep. Get your money out of losers and back to working for you elsewhere.
Turnarounds are specialty investing. I spent my business career doing turnarounds and have a record of getting the job done. However, few turnarounds are kind to small investors. Turnarounds can be fantastic investing opportunities for informed and experienced players. This is a very specialized area and certainly no place for an investing beginner. Learn first, gain investing experience and then we can talk about turnaround investing.
5. Averaging down = sinking returns
Three related mistakes are tied to losing investments. Winning investors do not hold losers. When they find a loser in their holdings they sell it as quickly as possible get back to holding a portfolio of winners.
Too many investors on significant drops in the price of an individual stock, hold on It is common and very normal human behavior. But it is a mistake. Too often holding on turns into the first of three related mistakes. Rule of thumb, the best move is selling as soon as you realize you hold a loser.
Compounding the first error of riding the price down, too many common investors expect to simply wait while the price recovers. Even when they realize they have a loser, they do not sell. That is a mistake.
That decision means they may wait for months or years holding a losing position. That is essentially dead money. That is mistake number two. Rather, get the money out and into a money making winner.
Mistake three often occurs should prices recover. Often poor investors ride through months or years sitting on dead money only to sell when the stock price rises to their original investment price. They think, with great relief, I got my money back!
Selling at that point makes certain they have no upside opportunity. It also ensured that waiting for your return to zero has kept your money away from any profitable investment. That is opportunity cost. The cost of missing the positive investment opportunities instead of holding dead money.
As soon as you can, bring dead money back to life. Only invest in stocks that make you money.
This combination of three mistakes is common, normal but costly investor behavior. You are fooling yourself to think that loss is not real until you sell. The best loss possible is the first loss. As soon as you know you have made a mistake, take the hit, sell and get the money to work making money.
6. Distracted investing = cash crush
Investors that don’t pay attention to their investments do poorly compared to successful people who do pay attention. Superior investors get results because they pay attention, do their homework and take action when necessary. Investors distracted by life or any part of it can be distracted and miss opportunity, necessary actions or worse, trouble.
Too many common investors, using a financial advisor or doing their own investing, make this mistake. It is your money and your future that is at stake. Paying attention pays off for a lifetime.
You have to pay attention to your healthcare. You have to pay attention to your safety. And you have to pay attention to your financial future. Even if you use an advisor, keep yourself aware and informed. That pays you with huge returns.
Superior investors are not normal, they are exceptional
To get superior results you must make superior choices and take superior actions. Take action and sell when you know you have a loser in your portfolio. Do so and get the money to work making you money. That simple change will make your portfolio sharply outperform investors that stay with losers. Selling losers gives you a key strategic advantage and makes you money!
Weeding losers out of your portfolio regularly puts more money into your pocket. Avoid the 6 sins of new investors and move a big step forward on the path to becoming a superior investor! Buying losers, averaging down and making investments without paying attention. Links to all seven parts of the series are at the end of this post.
What common mistakes should investors avoid? Answered!
This lesson covered the most common avoidable errors that harm investors. Knowing and avoiding these errors can significantly improve portfolio returns and your wealth building efforts.
Lesson takeaways,
Avoid 6 investing sins
Avoid 6 investing sins to improve your portfolio results by avoiding errors and missed opportunities. Errors of investing on news or turnarounds without research, holding losers or averaging down and not paying attention have big costs.
- News only investing = bad news!
- No research risks no or poor returns.
- Holding losers kills money. Sell losers and buy more winners.
- Bankrupt and turn around investing is high risks with many failures.
- Averaging down is a losing strategy. Sell losers, buy more winners.
- Distracted investing is investing without paying attention.
Other lessons related to:
Avoid 6 investing sins
Momentum investing trading play
Income value and growth investing
Tapering groupthink costs investors!
Investing trading and speculating differ
Comments and questions welcome
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Choices To Make Money Work:
Key investing success choices Lesson 215.01
Join exceptional wealth builders Lesson 215.02
Investing time or adviser time? Lesson 215.03
Small investors have advantages Lesson 215.04
4 Successful investor traits Lesson 215.05
Avoid 6 investing sins Lesson 215.06
Investment impatience destroys wealth Lesson 215.07
3 Yeses or no investment Lesson 215.08
Investing can be fun, interesting and slow Lesson 215.09
Warren Buffett explains gold Lesson 215.10
Next course 215 lesson 7:
Investment impatience destroys wealth
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Could you give an example with numbers for #5?
Sure, thanks for the question. I will work up some examples and make that tomorrow’s blog post.