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Money Girl
070 MG Common Investing Mistakes
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Today on MoneyGirl, we will take a look at the seven most common mistakes investors make and the lessons that we can learn from them. Several listeners have written in and asked how to avoid the most common new investor missteps. What am I talking about? Think back for a second. Have you ever found yourself saying, "That was stupid. I know I should have done better." Or, "Why did I sell that stock?" Or even, "Why did I listen to Uncle Irv's stock tip?" And do you have that condition I call "Red Farhead Syndrome?" You know, when you bang your head on the desk over and over because you feel you made a stupid mistake when investing. Do do do do! Help has arrived! Believe it or not, even Warren Buffett has made a mistake or two during his illustrious 40 years of investing. So, you should expect to make some mistakes yourself. The trick is to recognize your mistakes and learn from them. Mistake number one, using too much margin. Margin or borrowing to leverage your investment is known in investment circles as free money. But the truth is, many times it is exactly the opposite. If you use too much borrowed money and your margin investment start losing, your losses will be compounded. Remember, eventually, you will have to pay back the money that was borrowed, and if you didn't use margin wisely, you can really be in for some financial pain. If you use margin without discipline, you might as well just throw your money out of window. You'll get the same result. The lesson to be learned is simple. As a new investor, use margin sparingly, if at all. Wait until you are more experienced and more aware of the pitfalls of investing on margin. Mistake number two, buying stocks on unsubstantiated tips. This is the mistake played out so well on sitcoms and common routines, and even with your crazy Uncle Larry, who tells you that he is quite sure that this is the next hot stock. Taking a tip in itself is not a huge mistake, but not following up on these tips with thorough research, and not considering the source can be the biggest financial faux pas that you will ever make. Just because you got that tip from your crazy Uncle Larry, who is back on his winning streak, ever since he got back from the pen, may not be such a great long-term strategy. The lesson to be learned here? Thoroughly research any hot tips and try to get a second opinion before investing your hard-earned money. Mistake number three, day trading. As a luring and flashy as day trading appears to the inexperienced investor, day trading for the novice is nothing short of money masochism. You have shortly heard about investors who spent all day in front of the computer buying and selling stocks. You have also heard the stories of day traders making thousands on one trade before their first cup of coffee in the morning. But did you know these investors also started small? They worked their way up to the bigger profits and losses. In order to be successful, they need a good amount of data, research, and a well-heeled strategy to make a consistent profit. As a day trader, you need training, patience, and most importantly, discretionary capital. Without these and specialized trading software, you can lose and lose fast. The lesson to be learned, if you are not particularly skilled at dealing with stress, there are other options other than day trading to help you build your wealth. Look at day trading as a career, not a hobby or a sideline. September is a great month for planning. We start thinking about the rest of the year, whether it's back to school, big year-end work projects, holiday plans or travel. Planning ahead is crucial in life, especially when it comes to what happens when you're gone. Getting life insurance may sound daunting, but policy genius makes the process a breeze. 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And with eBay guaranteed fit, it's guaranteed to fit your ride every time. Keep your ride or die alive at ebaymotors.com. Eligible items only, exclusions apply. Calling all future shapers and dream chasers. MSU Denver works with you online and on campus. Learn with faculty and peers to forge your career. Your next starts now. We are the changemakers. MSU Denver. Mistake number four. Over estimating your abilities. This is probably the worst mistake the new investor can make. Over estimating your abilities as an investor is usually the product of early success. Oftentimes, when you begin managing investments, you can get swept up in the euphoria and start drinking in your own success. Overconfidence while investing is the trait of a rank amateur. The amateur who eventually wonders why his early success has turned into massive failure. Sure, if you invest your time wisely in research and strategy, you can do well. But you need to always be on the lookout for your next landmine. Always ask, "What am I missing? What can go wrong?" The lesson to be learned here. Do not assume that simply because you have a computer and the internet that you can beat the pros. Red and green buy and sell strategies may get you a profit here or there. But investing requires patience and above all, a touch of humility. Mistake number five. Forgetting to look at the big picture. Even after studying all the technical jargon, financial statements and predictions, many new investors forget to look at the rest of the picture. The economy and the trend. The pros say the trend is your friend and don't fight the tape. Sometimes we get caught up in the minutiae and forget to look around at what is right in front of us. Remember, investing in a bad stock in good times may produce profits. But investing in a good stock in bad times will often produce losses. Step back and look at things from a distance to gain perspective. The lesson to be learned. Looking at the big picture is just as important as being technically savvy and fundamentally correct. If the wave is big enough, it will knock down even the biggest building. The same is true with the markets. Remember, a rising tide raises all ships. Mistake number six. Compounding your losses with pride. Many investors spend days and even weeks before choosing to invest in that perfect stock. But what happens when the stock goes south? Well, many novice investors let their pride get in the way and they choose to keep the stock. William O'Neill teaches that a stock should be sold once they are 7% lower than your purchase cost. No ifs ands or buts. The lesson to be learned, no matter how much time you spend researching a stock before you invest, always have a sell discipline. Make sure that you are following a plan to ensure your downside risk is tolerable. Take pride and emotions and leave them at the door. There is no room for either of those in a profitable portfolio. And mistake number seven. Beware the bargain stock. Sometimes the stock is low because it's supposed to be. Sure, there are times when a stock is mispriced, but not often. There may be reasons that you are not aware of that the price has crashed 50%. Even if everything looks good, something may be awry. In many cases, there may be a fundamental reason for the decrease in price that will reveal itself some time in the future. Lesson to be learned, price alone should not be the determining factor in making a decision of whether a stock should be purchased. Do your homework. Cha-ching. And that's all for now. Courtesy of Andrew Horowitz. Guest host of Money Girls Tips for A Richer Life. Thanks for tuning in to Money Girl. And thanks to Darren, Katie, and Shannon for sending in questions that help with this important show topic. We're going to send you a copy of my book. Remember, these disciplines are just a few that I cover in my book, the disciplined investor, essential strategies for success. Pick up a copy at Amazon and start on the road to becoming a disciplined investor. As always, everyone's situation is different, so be sure to consult a tax or financial advisor before making important financial decisions. This podcast is for educational purposes only and is not intended to be a substitute for seeking personalized, professional advice. Thanks for listening. H5N1 bird flu is spreading in some animals. If you work with poultry, dairy cows, wild animals, or with raw, unpasteurized milk, wear protective gear and take precautions. cdc.gov/birdflu, a message from CDC. When you need meal time inspiration, it's worth shopping king supers for thousands of appetizing ingredients that inspire countless mouth-watering meals. And no matter what tasty choice you make, you'll enjoy our everyday low prices. 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