We make mistakes all the time in all areas of our life and the world of investing is no different. Though mistakes are a means for us to learn and improve, failing too many times in your investments can get really expensive! Like how Warren Buffett likes to remind us with his famous quote:
“Rule No.1 is never lose money. Rule No.2 is never forget rule number one.”
So in order not to lose money in the stock market (as best we can), here are FIVE common mistakes stock investors make that you should avoid:
1. Timing the Market
Timing the market is a risky business. Trying to time when a stock will move based on assumptions and predictions on what will happen in the future is dicey at best. Since we all don’t have a magic crystal ball that will tell what’s going to happen tomorrow, there is no certain way of knowing when a stock will move. Invest because you know a company is good investment with solid growth prospects; not because you think prices will rise in the next few weeks or months.
2. Buying a Stock Because It is “Cheap”
A cheap stock does not mean that it is a bargain. There is a difference between value and price, and knowing this distinction is the difference making or losing money in the stock market. A “cheap” one-dollar stock may only be worth fifty cents in value while an “expensive” hundred-dollar stock may be worth two hundred – which is the cheaper stock now? Obviously, the hundred-dollar stock. Like how another of Warren Buffett’s famous quotes sums this up perfectly:
“Price is what you pay, value is what you get.”
3. Buying a Stock Based on Dividends Alone
While every stock investor loves dividends, investing in a stock based on their dividends alone can be a huge mistake. If a company pays extremely high dividends, you have to check if their payout is actually sustainable. Is the company fundamentally strong enough overall to continue generating that level of profit and dividends over the long term? And most times, popular, high-dividend stocks are already overpriced and not worth the investment. Remember, no matter how impressive a stock may be, if you overpay for anything, you will never be able to make a satisfactory return!
4. Buying a Stock Based on a Hot Tip
If you invest in a stock solely based on a friend’s “hot tip”, rumour or recommendation, that isn’t an investment – it’s a gamble. Do you know what the company is about, how financially stable they are, or how much their stock is actually worth? What about your stock entry and exit points? Always take the time to research and analyze every investment you make – especially those based on a hot tip!
5. Not Planning for Your Liquidity Needs
You should only invest the money you can afford to set aside based on your personal needs and time frames. For example, if you have a particular need for cash in the next few months, it would be unwise invest that money in the stock market when you need it most. Even though you might know a stock might be a good long-term investment, the stock market can be extremely volatile in the short term; which is a risk you’d be unwise to take when you need the cash.