October 20th, 2017
1. They Dive in head first without doing the research. No 10ks, No Quarterly Earnings Reports, not even googling the companies first to see if they are a good investment. They just upon up their brokerage account, fund it with a bunch of cash and then start picking stocks at random, or selecting stocks of companies that they recognize or are familiar with. They just go crazy with their purchases because they are really excited or just naïve, or maybe they are just too lazy to take the time to do research. In general, there are two patterns that I most commonly see new investors falling into.
The first is that they bet the farm on one or two companies that they think are really cool, or that they heard might do really well. This drives me crazy, because it is establishing bad habits for the future. I can’t even pretend like this wasn’t me when I first started out investing at 18. I took my first $500 and threw it all on Tesla, but got scared 3 months in and sold it all for a $20 loss. The key to successful investing as a value investor is diversification. You will never pick every stock correctly, it’s just not possible, but by doing your research and diversifying your investments across multiple companies and even sectors, you can protect yourself from big losses while establishing a strong foundation for future portfolio growth.
The second pattern that I see new investors fall into is buying and selling rapidly with no real rhyme or reason. Its kind of like they see themselves as mini day traders. Except they have all of the balls and none of the experience. Its actually kind of funny because they will be so confident about the 26 trades that they made that day, but when you ask them why they bought or sold certain shares at certain times their answers will almost always be, because “I saw an article online that said to go buy this other stock now”! Being a successful value investor takes patience and experience, both of which come with time so these initial phases often don’t last long.
2. They Buy High and Sell Low. Everyone and their grandma knows that this is the opposite of what you are supposed to do. If you ask anyone on the street the main rule of investing, they will tell you, “Buy Low and Sell High”. And even though 99% of people know this rule, 99% of people don’t follow it and that’s why 99% of people lose on their investments. The principal behind the saying is simple, but actually following it takes patience, confidence, and research.
However, the main reason that most people, especially new investors fail in this area is because of the Media. The media knows what sells, panic, fear, uncertainty, doubt, but also greed, excitement, ease, and rags to riches stories. So as soon as stock prices are plummeting, you find fearfully written articles on the death of the stock market as we know it, with noted economists telling everyone to sell their stocks now! Conversely, when the market is preforming well, you will find a multitude of articles on how you need to buy stock XY&Z before its too late. The problem is that the general populous reacts to this news, and like trusting sheep they follow their misguided Shepard right off of the fiscal cliff.
My general rule is to do the opposite of whatever the media says to do. In this way when most people are panicking and selling off shares, I can swoop in and buy them on sale, and when most people are euphorically purchasing stocks at all time highs, I can sell my current holdings at a premium.
3. They Invest too much, or not enough. New investors commonly fall into one of these two traps. If they invest too little they often have their returns eaten away by trading commissions and brokerage fees. Let’s say you buy a stock on ETrade for $100. When you first purchase the stock, you will be charged a $7 commission, for ETrade putting your order on the market. Let’s say your stock grows by 10%! That’s amazing, you picked a winner! So now it’s time to sell. ETrade will charge you a commission of $7 to sell your share for you. So on the surface it looks as if you earned a 10% return on your stock, but once you factor in $14 in fees, you actually experience a loss of 4%.
On the flip side, some new investors invest more than they can afford to lose. They are excited by the prospect of the returns they could earn if their investments do well and they know that the more they invest the larger their returns will be. That’s all good and fine when they are winning, but if they lose big on an investment, they can find themselves in deep water very quickly. Never invest more than you are willing to lose.
4. They let emotions control their trading decisions. I find this is more common in investors who have financially over extended themselves. Both fear and greed become stronger and more controlling emotions as the size of your portfolio grows. In my opinion it is best to slowly grow the size of your portfolio over time so that you ease into your level of fiscal responsibility. If you dive in head first as a new investor with a large portfolio, it is just that much easier to allow emotions to control your trading decisions.
5. They check their portfolios every free second that they get. Initially, this may not sound like a bad thing, and it’s really not, it’s good to be excited and passionate about learning to invest. I know I was guilty of doing this for years. But what I found is that the more you check on your investments, the more emotionally connected you become to your money and the less logical your decision making. In addition, you can begin to take a micro view of your investments. What I mean by this is that If you are looking too closely at a stock for instance, every 1/2% swing up or down looks like it has the potential to be the beginning of an enormous crash or the start of a meteoric price climb. When in reality it is probably just the normal movement of the market throughout the day. Taking this micro view can be stressful and scary and can take the fun out of Investing, so I advise only checking on your investments when you need to.