6 Mistakes we all make Investing in the Stock Market

Investing in the stock market is a lot like starting your first job; you think you have an idea of what’s going on but in reality it pulls the rug out from under you and makes you eat a slice of humble pie. Although with careful prudence and wise investing you can make fair return in the stock market, we all make mistakes. Take some advice from someone who’s already invested before, and has both won big and lost big!stocks

1) Hindsight.

There’s an old saying, “hindsight is always 20/20”. Once you’ve been investing for a while, you’ll certainly run into this. Instances in which you sold too early or too late, missing out on money you could have made (or lost less). Oftentimes we’ll use this past insight to dictate our future decisions. Although ‘history does repeat itself’ and the stock market does follow patterns, don’t let this be your sole factor for making a decision. The stock market is a wild animal, as many times as it’s behaved and let you pet it, that doesn’t mean you shouldn’t wear safety gear the next time you pet it.

– Real life example: I bought $VLRS around a 52 week high, $13. Volaris is a popular budget airline from Mexico. I did my homework and saw nothing but positives. It had been growing steady, taking on more and more passengers. Its stock was doing nothing but going up, and I figured it was a good investment. My hindsight turned out false, as despite growing as a company, investors’ appetite for foreign stock was waning. It fell and fell and I finally got out around $8.

2) Saying always or “I’m 100% sure”.

Going off of #1, you can never be 100% sure and if someone tells you that they are; they are either lying to you or are committing insider trading, punishable by jail time. No one knows what tomorrow holds, much less what an individual stock will do. There will always be an element of risk to investing in the market, no matter how good you are. Certainly place your bets, but place them wisely.

– Real life example: I bought $GTAT around $17.50. Amongst other ‘advanced technologies’, they manufacture sapphire, which rumor had it was being developed as an unbreakable screen for the iPhone. I told myself that I was absolutely sure it was going to double, as there was no way that Apple wouldn’t use this for their new iPhones. Months later, the stock is still right around there. Although the rumors are still there, other rumors suggest GT Advanced Technology is struggling to meet demand and that Apple might not go through with it. What seemed like a sure bet stayed steady where I bought it.

3) Betting against your gut.

It’s an old relic from our days in school, ‘always go with your first instinct’ when picking a multiple choice answer. Anything after that is likely your conscious doubting or causing you to second guess yourself. More often than not, your gut will serve you right. If you see a stock that despite people singing its praises and you’re not so sure…go with your gut. Don’t let others sway your investment decisions, make up your mind about an investment and stick with it.

– Real life example: SiriusXM radio, the favorite of many a music junkie, provides satellite radio coast to coast. Back 2008, it was trading around $1.50. It had just gone through a merger (Sirius and XM Radio) and people were concerned about the future of music. Pandora had entered the scene and people were worried about SiriusXM. My gut told me otherwise and I bought in. I knew that people loved radio and that it would only be a matter of time before the merger saw real cost savings. A year or two later, I’d doubled my money and sold around $3!

4) Trading impulsively.

Despite #3, sometimes you should listen to that voice in your head and think with your head, not your heart. Just because you’re sure it’s a good idea today doesn’t mean you’ll feel the same way tomorrow. Sometimes we let ourselves get swept up in hype and emotion and find ourselves not thinking straight. We’ll make up our minds and decide that NOW is the time to act. I find that it’s best to wait a day or two before making any investment decisions. If you still feel the same way after a few days, it’s probably a good call.

– Real life example: $FAZ. FAZ is a complex financial instrument that is basically always shorting the market. In simpler terms, FAZ seeks to profit when the market goes down. It’s a 3x multiplier, so when the stock market goes down, it’ll go up (a lot). If you follow the news, the stock market is at an all time high. So high in fact, that people are saying we are due for a 10% correction, or a fall. A couple of weeks ago, amidst all that talk, the market had a pretty bad day. Impulsively sensing the end was near, I jumped into FAZ. Turns out it was just a bad day and nothing more, the market came back the next day. Had I waited a few days, I likely would have seen this and not made a bad call.

5) Trading frequently.mutual fund

Each time you make a trade, you’ll be forced to pay around $7 per trade. Effectively that means you’ll face $14 in the life of owning a stock; $7 when you buy and $7 when you sell. If you’re not careful, those fees will quickly start to eat away at your profits (and losses!). Don’t try to be a day trader, making constant trades and taking little profits here and there. Focus on long-term investing and don’t get caught up with paying all your profits to your broker.

6) Timing the market.

Once you get into investing, this thought will creep up into your mind: “Well I really think it’ll fall another $0.25 tomorrow, so I’ll hold off on buying until then” or “I’m ready to sell but it seems to be on a run right now, so I’ll wait a day or two more”. As we learned in #1 and #2, there’s no certainty in this market. If could fall $25 tomorrow instead of the $0.25 you thought it would. I know that we’ll spot trends and think that an upcoming announcement will sway it one way or the next, but there’s no way to be sure. With each stock, find your ceiling and your floor. Name your exact selling and buying point and stick to them.

– Real life example: I’ve got a couple hundred dollars just sitting in my brokerage account right now. I’ve got it sitting there because I feel like the market is due for a correction in the near future. I don’t know it for sure but I feel it. This is really pretty foolish of me, as even if I buy in and the stock market tumbles, I’ll likely make it back when the market comes back. I’m foolishly trying to time the market.

There’s no secret sauce to investing in the market, just discipline. Learn your own investing style and know what works and doesn’t work for you. Play by your own rules and always remember Warren Buffet’s first rule of investing: Don’t lose money!

Thanks for reading! If you’re interested in learning more…check out one of my favorite books (below) by Jim Cramer that I’ve found super helpful in becoming a better investor. If you’re confused about stocks and investing, check out these articles: How should I invest in stocks? or How does the stock market work?

One Response

  1. Many rookie investors think they can beat the market just because they’ve been successful in life. The market and the computers on Wall Street are smarter than you! Never forget that.

    Jay

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