7 Biggest Mistakes

Table of Contents
The Seven Biggest Mistakes Most Investors Make 3
One: Using too many different investing methods and styles. 4
Two: Using too many sources for investing information. 7
Three: Cluttering up your investing with layers of complexity. 11
Four: Owning too many individual stocks. 13
Five: Believing that “sell” is a dirty word. 15
Six: Fighting the market’s trend. 20
Seven: Not expecting to make mistakes – and not fixing them
quickly. 24
So What’s Next? 28
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Seven Biggest Mistakes Investors Make
The Seven Biggest Mistakes Most
Investors Make
Results don’t lie. Most stock investors, if not all, have some bad habits that
keep them frustrated and ineffective in the market.
What kind of results are you getting from your investing?
If you’re like most people, you’d probably like to improve your investing
results. One of the reasons you’re not getting what you want may be that
you have no plan for investing in the market. You take tips from friends or
TV personalities, and you invest on “gut instinct” rather than zeroing in on
a method and sticking to it.
So what habits result in better investing? The
good news is: It’s not that tough to change your
investing habits, though it might mean giving up
some of your long-held beliefs. And you’ll have
to accept that you absolutely won’t be able to buy
every stock that makes enormous price gains. No
one does, and no investing system will help you
spot every single huge gainer. But you can get
enough of them to make a difference in your
financial position, and in your life.
So let’s jump in, and look at the Seven Mistakes that are preventing you
from seeing better results in the stock market.
One of the reasons
you’re not getting
what you want may
be that you have no
plan for investing in
the market.
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Seven Biggest Mistakes Investors Make
One: Using too many different
investing methods and styles.
As you might have guessed by our name, Simple Growth Investing, we’re
growth investors. In a nutshell, that means we focus on stocks with hot
new products, or an industry that’s in favor now. There’s something new
driving sales, which in turns drives profit growth.
And when professional investors – like mutual funds, banks, insurance
companies, hedge funds and pension funds – see those hefty earnings
increases, they snap up shares. And what does that do? It sends the price
higher.
An example of an outstanding growth stock from the past few years is
Apple. That’s a no-brainer: Think of the iPod, the iPhone, increased
purchases of MacBooks and iMacs. As the company continued innovating
and introducing great products, people kept buying. Investors caught on,
and the share price kept moving higher.
Another big growth stock has been Baidu, a Chinese Internet search engine
and portal. Another one that’s easy to understand. As more and more
Chinese citizens move into the middle class, they’re using the Internet
more, buying stuff online, playing games – everything people all over the
world are using the Internet for. And professional investors see plenty of
potential remaining for big growth in China – so they’ve been grabbing
Baidu shares.
Stocks like Apple and Baidu (and many others) have rewarded investors
with outstanding profits. Between January and October, 2009, Baidu
climbed 189%. Apple rose 120% in that time.
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Seven Biggest Mistakes Investors Make
You can find other names that have risen even more. Some of those have
been growth stocks with a solid track record of sales and earnings growth.
That’s the kind of stocks we focus on here at Simple Growth Investing.
You might also find speculative stocks – those with no profitability and
usually a very low share price – that have also scored big run-ups. It
happens, no question. But in our experience, and the experience of many
other successful traders, those stocks can be riskier and if you’re not super
careful, can lead to sudden losses.
So when we say you should decide on an investing style and stick with it,
we’d recommend growth investing. We have plenty of posts and materials
here on Simple Growth Investing to help you with that.
But if you do choose growth investing, don’t mix it with some speculative
stocks, some value investing, some long-term investing and maybe some
day trading for a quick pop here and there. By mixing all these styles, you’ll
just dilute your focus and dilute your results.
So pick a style and stick with it. You’ll develop an expertise, and you’ll
begin to recognize the better names, and understand when to buy and sell
them.
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Seven Biggest Mistakes Investors Make
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Seven Biggest Mistakes Investors Make
Two: Using too many sources
for investing information.
All stock information is not created equal.
Be judicious about what sources you use, and understand what they’re
really saying.
For example, be very cautious about reading posts on open-access stock
forums. It might initially seem like these are populated by knowledgeable
people, but the sad truth is: Many of the posters on online stock forums
simply have no idea what they are talking about. They’re struggling to get
direction. They test ideas on others – who are often just as clueless. They
have opinions from Mars. They get into pissing matches where nobody has
any sense of what’s correct.
So why would you bother? Oh, right – to get stock
tips, or to validate your ideas. But seriously – don’t
waste your time on most stock forums. Occasionally,
there’s a poster who is a bit more knowledgeable, but
in many cases, even the most uninformed people can
make themselves sound authoritative while they’re just
spouting their opinions!  Avoid these places. You’ll get
more out of an old Starsky & Hutch rerun.
And never buy a stock just because someone in the media recommended it.
Do you ever watch those financial TV channels that have market news
throughout the trading day? If you do, pay no attention to the parade of
professional fund managers who grace the screen all day, telling you “what
trade works now!”
B e j u d i c i o u s
a b o u t w h a t
sources you use,
and understand
w h a t t h e y ’ r e
really saying.
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Seven Biggest Mistakes Investors Make
Because guess what? Another guy will be on in five minutes, telling you
about his idea for the best trade, and it’ll be something altogether different!
Can they both be right? And either way, how is the strategy of a
professional money manager – with hundreds of millions to invest, and a
full-time research staff at his disposal – right for you? It can’t be. He’s
operating in a different universe from yours. Ever notice how many of the
fund managers on TV are touting the big-name, big-cap, widely traded
stocks? That’s because with tens of millions or hundreds of millions under
management, they can’t be jumping in and out of illiquid small caps –
exactly the kind of stocks you’re nimble enough to enter and exit quickly.
Fund managers strive to outperform the major indexes.
That makes it too risky to hold large positions in too
many thinly traded small caps. Why is that? Because
smaller stocks are often more volatile than bigger, more
established companies. Say Fund Manager Joe Schmoe
decides to start making some purchases in Acme
Widgets, which trades 300,000 shares a day. Because so
few shares are available, it’s probably going to be hard
for Joe to get the shares he wants. His buying pushes the
stock’s price higher.
But the next day, Fund Manager Jane Schmane realizes that her investment
in Acme has netted her a paper profit, and she has some reasons to
reallocate cash. So Jane begins unloading shares – which sends the price
lower as quickly as Joe sent it higher.
That’s grossly oversimplified, of course, but you get the idea. That’s a big
piece of the reason why these guys on TV will keep telling you why WalMart (which trades about 17 million shares a day) or Microsoft (which
trades about 58 million shares a day) is or is not a good idea today. They
won’t be talking about a little-known tech stock that is showing fantastic
gains, and has excellent earnings – but only moves 300,000 shares per day.
Smaller stocks
are often more
volat i le than
bigger, more
e s t a b l i s h e d
companies.
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Seven Biggest Mistakes Investors Make
Now, Wal-Mart and Microsoft are both great companies. I’ve shopped in
the first one, and I’m using the operating system of the other right now!
But because those stocks are so big, and so widely owned, the chances of
explosive price growth are quite low. Of course, the chance of a sudden
swing to the down side is also low – making the stock a safe choice for big
fund managers, who have to show results better than the S&P 500 and
have to prove themselves vs. other fund managers.
So by owning the widely traded big-cap stock that’s trending along in a
more or less sideways fashion, Joe or Jane Fund Manager avoids a lot of
risk and the potential for losses. That will make his or her year-end return
look better than if the fund showed some weakness due to investments in
little-known, volatile, thinly traded stocks.
So all this means: Following the
recommendations of fund managers on TV or
in magazines is not the way you’ll maximize
your investment. Those recommendations are
not made with you in mind, even though they’ll
say things like, “Here’s what the retail investor
[that’s you!] should do.” Nah. That fund
manager has absolutely no idea how to
recommend stocks for you. Pay no attention.
One final thought on this topic. When one of these managers appears on
TV, notice how the show host doesn’t consistently ask him or her how
much the fund is up or down for the year. If the fund is having a great
year, you can be sure the guest will want it brought up. Usually, it comes up
in the “talking points” that the fund manager’s PR person has supplied to
the show. But frequently, performance doesn’t come up at all. Which leaves
you to wonder: How has this fund done in the past year?  Three years? Five
years? If the fund has underperformed during that time, you probably
won’t hear about it while you’re busy writing down this genius’ picks. So be
wary about the “expertise” of these folks who appear on television.
F o l l o w i n g t h e
recommendations of
fund mana g e rs on
TV or in magazines
is not the way you’ll
m a x i m i z e y o u r
investment.
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Seven Biggest Mistakes Investors Make
So it’s OK to watch the financial channels to get some basic news on
what’s moving the markets, but never, ever watch for stock tips. (Or even
worse, tips on how to be trading options. More on that a bit later