At some point or another, it has occurred to the vast majority of us: you are at a cocktail party enjoying your beverage and hors d'oeuvres when "the blowhard" comes your way.
You should prepare yourself for him to boast about his most recent "huge success." This time, he has decided to take a long stake in Widgets Plus.com, which is the most cutting-edge and cutting-edge online marketer of home gadgets.
You find out that he is utterly enamoured with the firm despite the fact that he understands nothing about it and that he has invested 25 percent of his portfolio in the company in the hope that he will fast double his money.
In spite of your opposition to hearing him ramble on and on, you begin to feel at ease and smug in the knowledge that he has made at least four main investing blunders and that, with any luck, he will learn his lesson this time.
In this post, in addition to the four errors that the resident blowhard has made, we will discuss four additional errors that are rather prevalent.
Buying low and selling high is the objective of both investors and speculators, but very few people are able to consistently achieve this goal. This is true even for those who make their living in the investment industry.
The overwhelming amount of mutual funds, pension funds, bank trust accounts, and investment advisors are unable to obtain the returns on their investments in common stocks that are indicated by prominent stock indexes. This is the case for both individual investors and institutional investors.
According to the law of averages, some people may have a year in which they do very well, and these people frequently find themselves inundated with so much fresh money to invest that they do not know what to do with it.
However, only a small percentage of investors are successful in outperforming the market over extended periods of time.
Purchasing Stock in a Company You Are Unfamiliar With
A common tendency among investors is to put their money into the newest "it" industry or one that seems impressive. It is possible that they know very little, or even nothing, about the technology, biotech, or the particular business in which the underlying company is engaged.
Of course, this does not prevent them from making an effort to board what they believe will be the subsequent train of profitable opportunities. In this case, the investor is missing out on all of the perks and advantages they would have over other investors who know less about the business in general.
If you have a solid grasp of a company's operations, you will have a significant leg up on the majority of other investors. For instance, if you own a restaurant, you'll be familiar with the various companies that are active in the restaurant franchising industry.
You will also get an inside look at the routines of the customers, giving you this information before it is known to the general public. As a corollary, you will be aware, well in advance of the vast majority of other investors, of whether the business is growing, getting slower, or slowing down.
Taking our hypothetical situation a step further, if you pay attention to the shifts that are occuring in the market sector in which you operate, you ought to be able to recognise excellent chances for financial investments.
It would appear that having first-hand expertise can result in profitable investments (or avoiding losses).
If you invest in a firm that is "above your pay grade," it is possible that you will be unaware of the nuances and complexities of the company in issue.
This is not to imply that you must be a gold miner or a medical doctor in order to invest in firms that are involved in gold mining or healthcare, but having either of those backgrounds certainly wouldn't hurt!
You should make the most of any opportunity in which you have an unfair advantage over the majority of investors and push that advantage as far as you possibly can. If you are a lawyer, you may have an advantage in determining when it is appropriate to invest in companies that generate money through the litigation of other parties.
If you are a surgeon, you will have a greater knowledge of how well (or poorly) a surgery robot is executing their duty, and as a result, you may have an inner track on how well the underlying stock may function. If you are not a surgeon, however, you will not have this insight.
Overconfidence in the Stock
When dealing with penny stocks, this is very important to keep in mind. The majority of investors invest in low-priced stocks with the mindset that they are buying lottery tickets and have the expectation that they would be able to turn their $500 or $2,000 into a substantial fortune.
When you first start out in the world of investing, this is not the frame of mind that you should have, despite the fact that it is occasionally accurate.
You must be honest about what you're likely to anticipate from the success of the shares, even if such data are much more boring and ordinary than the unrealistically high levels for which you may dream. If you do this, you will have a much better chance of achieving your goals.
Take a look at how the stock has been performing up to this point in time. In addition to this, keep a close eye on all of the other investments that belong to the same sector.
I'm curious about the historical performance of the underlying investment; has it typically risen 5% or 10% year, or have those gains been closer to the hundreds of percentage points?
Is it more typical for a company's stock to spike by tens of percentage points than it is for it to move by one point at a time for most of the companies in the industry?
You may get a sense of the volatility and trading activity of the underlying shares based on the recent performance, even if it is not predictive of what may be to come in the future, but you could get an idea of it.
A stock will normally continue to behave primarily the same way it has in the past, and in most cases, this behaviour will be consistent with the behaviour of the entire industry.
Using Funds That You Cannot Risk
If you could see how drastically different your trading strategy becomes when you use money that you cannot afford to lose, it would blow your mind. Your feelings become more intense, your stress level soars to new heights, and you find yourself making decisions regarding purchases and sales that you normally never would have considered.
An old saying from Japan states that if you gamble with any amount of money, you will always end up losing all of it. You must never put yourself in the high-pressure situation of putting money on the line that you need for other reasons. This is a circumstance that should be avoided at all costs.
When you engage with cash that you are willing and able to lose, you will be capable of making much more relaxed decisions regarding trading. If you do not let fear or other negative emotions influence your trading decisions, you will, in general, have a greater amount of success with your transactions.
Being Motivated by Restless Waiting
We may have touched on the various feelings that are possible to have when you are investing, but one of the emotions that might cost you the most is impatience. It is important to keep in mind that stocks are shares in a particular company and that businesses work considerably more slowly than the majority of us would normally like to see or even than the majority of us would expect them to.
When company knows to implement a new plan, it may take many months, or even several years, for that new approach to begin to take effect throughout the organisation. A common mistake made by investors is to purchase shares of a company's stock and then immediately anticipate that those shares will operate in their best interest.
This utterly disregards the somewhat more realistic timetable within which businesses function. In most cases, it will take a great deal longer for equities to make the movements that you are looking for or anticipating. When customers initially begin investing in shares of the company, they must resist the temptation to let their impatience get the better of them—or their wallet!
Trying to Reach the Spot Where the Puck Was
Individual investors typically perform much worse than institutional investors because they tend to purchase into the very heights of a market fad and then sell out (or be sold out) following the eventual crash in the market.
They make their purchase of the remaining inventory of pin-spotting machine manufacturers just in time for the completion of the final bowling alley. They pour money into oil-drilling programmes in less desirable sections of the country. (Some of you may recall the "overthrust" belt from the early 1980s, which occurred with the height of the price of petroleum.)
In the aim of "getting in on the first floor," they seek out new concerns and obscure enterprises that have a story (usually concerning some new technical wonder). If such a company is successful, these investors will drive up the price of the company's stock to incredible levels so that they may sell it at a lower price once the excitement subsides.
Skating to where the puck was, as one observer with a background in sports put it, is how the typical investor approaches their investment strategy.
It is common practise to explain this occurrence by pointing to the competing human emotions of greed and fear. [Citation needed] When people (even the experts, who are, after all, also human beings), including themselves, realise that others are profiting from an upward rise in the market, it encourages them to participate in the movement themselves.
This approach frequently has the effect of driving prices of the object of speculation to levels that were previously inconceivable. The rising movement continues until the very last buyer has been duped into purchasing the item.
When the eventual catastrophe arrives, fear will drive the market, which will result in prices falling precipitously until every last speculation is eliminated. This happens frequently at prices that are not just a significant amount lower than what was paid, but also a significant amount below than any realistic standards of worth.
The waves of speculative price movements and manias have been adequately described for a long time. This is because they are a component of human behaviour. However, our comprehension of them is limited. In particular, no one has ever devised a method for estimating how long a specific craze will last or how high or low prices will go as a result of a mania. Neither of these things has ever been possible.
Managing Impulse
Investors need to be on constant guard against falling in with the crowd and giving in to the contradictory emotions of fear and greed, which is the primary factor investors become their own worst enemies. Investors need to be on constant guard against falling in with the crowd and giving in to the conflicting emotions of fear and greed. The method of investing that is advocated in this book is one that is capable of achieving a lot in this respect.
If you restrict yourself to index funds that own hundreds or even thousands of stocks, or if you stick to the boring equities that often appear in the HYD strategy, you won't have anything to brag about when you go to cocktail parties.
On the other hand, doing so will make it possible for you to steer clear of the destructive attachments that so many investors appear to form with their prefered stocks over time.
Most importantly, our method should make it possible for you to overcome what is perhaps the most fundamental inclination that investors have, which is the desire to increase one's holdings in whatever has increased in value and decrease one's holdings in whatever has decreased in value.
This is the drive that most likely contributes to the manias as well as the peaks and troughs that are associated with speculation. To quote William McChesney Martin, who served as Chairman of the Federal Reserve for a lengthy period of time, "But the punch bowl always runs dry just when the celebration is getting good."
You will miss out on a significant portion of the exhilaration if you sell into rallies and purchase into drops; however, you will experience significantly less pain when the inevitable response takes place.
Predictions that are in line with reality
The ability to maintain reasonable expectations is yet another critical component of successful investing. According to what the famous author of the Dow Theory Letters, Richard Russell, has written:
The rich investor never has the feeling that they are under any kind of obligation to "earn money" in the market. The affluent investor is typically someone who is knowledgeable about values.... If there aren't any exceptional values, the wealthy investor will sit tight and wait.
He is in a financial position to wait. The money is flowing in on a daily, weekly, and monthly basis for him. To put it another way, he does not REQUIRE the market. He is confident that he will find what he is looking for, and he is not bothered by the prospect of waiting weeks, months, or even years (they call that patience).
Who will look out for the underdog? This individual is constantly under the impression that he needs to "earn money" in order to "push the market to do anything for him." Compounding is beyond the comprehension of the young man, as is the concept of financial management.
… He lacks patience, and he has a constant sense of being under pressure. He keeps telling himself that he needs to make money as quickly as possible.
And he had aspirations of making "huge dollars." In the end, the little person squanders his money in the market, he loses his money gambling, and he dribbles it away on useless plans. All of these things contribute to his having no money left over. In a nutshell, this "money nerd" spends his entire life trying to climb the escalator in the opposite direction.
Now, this is where the irony comes into play: If the average person had started out by committing to a strict policy of never spending more than their income, and if they had taken any additional income and invested it in secure investments that produced additional income, the average person would eventually be in the same position as the wealthy person, with money coming in daily, weekly, and monthly.
In addition to this, over the course of time, he would eventually begin behaving and thinking like the wealthy guy. In a nutshell, the small person would end up on the winning end of the financial equation rather than on the losing side.
The Dollar's Deception
The persistent erosion of the purchase power of the dollar has the potential to skew investors' perceptions of the market.
A sensible investor in today's market cannot reasonably anticipate that a portfolio will yield more real disposable cash than three to four percent of the value of the principal without negatively impacting the purchasing power of the portfolio.
The return on investment for conservative bond investors during times of stable currency values is the same as it is now. Even at that rate of return, it may be difficult to maintain profitability in this day and age of persistent inflation and punitive tax of nominal capital gains.
In the case of people whose day-to-day costs of living are covered by income from investments, this question might become extremely important if they want to keep their buying power and be able to leave the main to their successors.
A significant portion of interest income is not actually income at all; rather, it is compensation for the decreased buying power of the principal and for the possibility that capital gains are simply inflationary illusions. It is possible that as a result of this, investors would be led to assume that their financial position has increased while, in reality, it has worsened.
A method that could work for these types of investors would be to adopt the practises that are currently followed for the endowment funds of many different charitable organisations: Maintain a running total or a rolling mean of the value of your investment assets, and take off a predetermined percentage of that value each year, regardless of the amount of the investment's annual income.
The Wrong Sources of Stock Information for Investing
This is a point that cannot be overstated in importance. There is no lack of those who call themselves experts and are prepared to share their point of view with you while packaging it and presenting it as if it were informed knowledge that is always right.
Finding and isolating guidance sources that can reliably assist you in making a profit from your investments is one of the most important aspects of making profitable investments. You will probably come across hundreds of pieces of absolutely terrible advice for every helpful piece of information that you come across. This is just the way the internet works.
Keep in mind that simply because an individual has been published or questioned by top media outlets does not mean that they are knowledgeable in the subject matter that they are discussing. Even if they have an excellent understanding of their subject matter, that does not guarantee that they will be correct in their assertions.
As an investor, it is therefore your responsibility to determine which sources of data should be trusted because they have shown themselves to be credible and have proven a recurring pattern of knowledge.
After you have located the people or services that could result in profits, you should still only depend partially on their thoughts; instead, you should mix those with your own investigative work and judgments in order to make your trading decisions.
If you find out that a stock is being given out for free, particularly if it is a penny stock, you can practically be assured that it is being driven by players who have big hidden interests.
If you read about the viewpoint of a professional on something like CNBC, you might find that this is not the case. Nevertheless, when you hear about the newest "hot penny stock" that is going to fly through the ceiling, it is definitely and categorically true what they are saying (according to greedy promoters).
Dishonest stock promoters can be found in seemingly never-ending supply out there. Their passion is to find ways to benefit from your acts so that they can gain while you suffer the consequences of those actions.
One drawback is that in order for them to make a profit, it is likely necessary for you to suffer a loss. Speculative share investing is mostly a zero-sum game, which means that in order for one person to gain one dollar, another person must suffer a loss of one dollar.
Because of this, swindlers and promoters put in such a lot of effort to pump up the price of worthless shares. When they walk away from the situation, leaving everyone else in the dust and bankrupt, the amount of profit they gain will be proportional to the amount of money they received to drive up the stock prices.
Taking the crowd's lead
The vast majority of people, in many instances, do not become aware of an investment until after it has already achieved favourable results. When specific categories of stocks have price increases of twofold or thrice, the mainstream media has a tendency to report on the phenomenon and inform the public about how popular the shares have been.
Sadly, by the time the media gets engaged with a storyline about rising shares, it is almost always after the stock has already achieved its highest point possible in the rise.
This aspect led to an overvaluation of the investment, and the news in the media came much after the fact. Despite this, the attention on television, newspapers, the internet, and radio drives the price of the equities further higher, into the region of being highly overvalued.
Recent events in the recreational marijuana stock market have provided clear evidence of this tendency. Despite the fact that some of these minuscule businesses had as few as two or three employees, their combined market value was estimated to be somewhere in the neighbourhood of half a billion dollars.
In certain cases, an old gold mine that was on the verge of going out of business would add the word "cannabis" or "marijuana" to the name of their firm, and the price of the company's shares would immediately double or triple.
At no point in time did investors check into the company thoroughly enough to comprehend all of the issues, which included tens of millions of dollars in debt, no income, and millions in continued losses each month.
Find a service charge counsellor who will take the time to inquire about you the relevant questions about your life, your objectives, your concerns, and your economic ability and construct an adequate investment roadmap to achieve rational goals. Doing the research necessary to find such an advisor will help you avoid making poor decisions, so make sure to do it.
If you want to be successful, you can't rely on internet media, brokers who want to sell you anything, or your own too optimistic expectations; it requires time, discipline, and unshakable belief to avoid the various traps and reach desired goals.
The vast majority of us are not very good at managing our investment portfolios, despite the fact that we are completely prepared to make long-term investments. Many of us are prone to thinking in the short term, which runs counter to the objectives we have set for our long term investments.
In a similar vein, we are unable to properly plan our investments, which results in psychological errors on our part.
Lack of self-control emotionally is why most people lose money in the stock market, but I add other aspects in this article. People who have failed will often try to blame the market when in reality, most investment failures fall squarely on the investor.
Last but not least, many investors fail when they invest what they can't afford to lose. Whether that means borrowing too much, not setting aside money for taxes, or going all-in on a risky bet, investing what you don't have is a foolproof method for losing everything that you do have.
Stock markets tend to go up. This is due to economic growth and continued profits by corporations. Sometimes, however, the economy turns or an asset bubble pops—in which case, markets crash. Investors who experience a crash can lose money if they sell their positions, instead of waiting it out for a rise.