5 Classic Investing Mistakes
Have you or someone you know ever made one of these classic and costly mistakes?
1. Getting stuck in an investment that is not liquid
An “investor” had a rare shot at investing in a crypto company early on. Let’s say he invested $100,000.
The company exploded. His investment shot up to $12,000,000.
Yes, 12 million.
Even after sharing a big chunk of the proceeds with your favorite uncle, that’s enough to quit your job, never work another minute in your life, buy all the toys you’ve ever dreamt of, and likely never have enough time to spend all of this money.
Except that there was one tiny problem: there was no marketplace to sell his shares and realize his profits.
All he could do was wait and see. So he waited. And he saw his shares plummet back to earth.
The 12 mil became 10, and 5, and 1.
Then it became half a mil, until it settled at around $200,000.
That’s when he was able to sell his shares.
A double is still a fantastic return, but the moral of the story is: don’t get stuck in illiquid investments.
Trading “volume” is a way to assess how many shares change hands in a given day. Don’t get involved in stocks or investments that are so thinly traded, that you may not be able to sell them when you want to or need to.
2. Investing in companies you don’t understand
Warren Buffett, the “Oracle of Omaha,” one of the most brilliant and richest businessmen and investors, was ridiculed as an old geezer when he refused to invest in dot-com companies that were priced ridiculously high, yet didn’t have a penny in profits.
Guess who had the last laugh during the dot-com crash?
Buffett is notorious for not investing in businesses he doesn’t understand.
In Berkshire Hathaway’s annual report in 2001, he wrote, “We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.”
Such exciting companies included Acme Brick, Shaw Industries, Johns Manville and Benjamin Moore.
Are you excited yet? Buffett sure is…
3. Timing the market
For most investors, trying to time the market is a mistake. Professionals have tried for decades to time the market, which means anticipating when a particular stock or a particular market is going to go up or down.
If you hear that someone is a genius at predicting what the stock market is going to do, you should run!
There are countless examples of companies that were supposed to do great things, and stocks that were supposed to “explode”… yet ended up imploding.
And there are plenty of examples of companies that were deemed losers, that ended up winners. Whether it’s deserved or not is irrelevant, the market doesn’t care about your feelings… Remember left-for-dead businesses like GameStop and AMC? Who could have predicted their recent exponential gains… and losses?
Investing based on assumptions is gambling, not investing.
4. Falling in love with low-priced stocks
A classic rookie mistake is to think that penny stocks are a good way to start investing because they only have $500 or $1,000 to invest, and therefore should only buy cheap stocks.
How much a stock costs tells you exactly nothing about its quality or upside potential.
What matters is not the price of the stock, but the value and prospects of the company.
5. Falling in love with a company
You bought a company because you love it and you use their products.
You respect the CEO and their mission.
You admire the core values of the company.
When the stock price tanks, you don’t sell because you believe in the company and your hero – the CEO.
That’s a common mistake. Let’s be real. You didn’t buy the company to prove your admiration. You bought the stock as an investment because you were hoping to make money!
If you love the company so much, tattoo its name on your forehead. But don’t buy and hold on the stock any longer than you should.
When the facts or the fundamentals of the company change, then change your mind and sell the stock!
Investing should be a mechanical, rational decision. Emotions should have no place in investing, yet they are the secret ingredient to financial success.
Don’t panic, don’t fall in love, don’t get too greedy.
It’s often easier said than done, but it’s critical to your success as an investor.
Phil Zeltzman, DVM, DACVS, CVJ, Fear Free Certified