As we march towards our next quarter, I would like to share what I believe are the 5 most common mistakes an average, inexperienced and even the most experienced investor makes! These mistakes are even more common, when we face tough market conditions, like the world has been facing in the first half of 2010. At stockbuzznow, we make our best efforts to avoid these mistakes, perhaps one of the many reasons, we have been crushing the market in both good and bad times!
1) Lack of patience
We buy and want to be rewarded immediately! When we wake up each morning, we just want to see the market green and the stocks we own soaring high. If a stock is flat for a while, we want to sell it. If a stock goes down, we dislike it. If a stock goes up, we are tempted to sell it too soon. Remember, the world's most successful investors have been the ones who have had the patience to hold their stocks not just for years, but decades!! They are the ones who have consistently invested in quality businesses, held them for years and seen the businesses grow to the fullest! Steve Jobs would have been a much richer man had he not sold huge positions in AAPL when it was trading under $29, while it trades over $270 today!
2) Lack of temperament
As an extension to our previous bullet point, it is not easy to be patient! A long and successful journey is more often than not, full of ups and downs, tough economic phases, sometimes recessions, all of which lead to reckless selling. While many lose their temperament and give up, the ones who hold their nerves and continue to invest steadily and regularly are the ones who succeed!
3) Too much in and out
While it may appear that repeated profit booking may be a wise thing to do, just in case the market was to fall, statistics prove that is rarely true. You only end up paying more taxes and killing some potential big winners too soon and gifting your broker commissions! Buy at regular intervals, sell some periodically, but be prepared to hold some for years!
4) Lack of diversification
AAPL, GOOG, MSFT, INTC, YHOO, C are some of the stocks which are commonly discussed and invested into by an average investor (specially if you a techie!). But that may not be good enough! A successful portfolio must be exposed to multiple sectors, varying business sizes, risk and international stocks. This guards your portfolio from numerous risks and uncertainties.
5) Ignoring Fundamentals
Not all rising stocks are good, and not all falling stocks are bad. Stocks often rise on speculation, getting attention of investors who try to join the ride, only to regret later. Similarly, some good stocks may fall on fear, driving investors away, only to bounce back sharply with time! One must always cater to the fundamentals of the company regardless of whether the stock is rising or falling. A fundamentally healthy business is likely to reward investors and withstand bad patches better.