Everyone makes mistakes on investing in stocks. Even Warren Buffet, the best investor of all time made a mistake in Kraft Heinz. The key is to learn from mistakes.
Every expert was once a beginner. It is important to learn from experience and get better. In this article, we are going to discuss the most common investing mistakes beginners make.
It is okay to make mistakes in investing as long as you learn from it. Investing in stocks is different from other kinds of income.
1. Focusing Too Much on the Short Term
Its too tempting to focus on the short term. When a stock go up a lot or go down a lot in a couple of days, most people gets emotional.
Sometimes we’re going to sell a stock just because it is down, without any difference in the company itself.
The stock market moves up and down all the time. In the short term, there might be a 50/50 chance for a stock to go either way. Even great companies can go down on the short term.
On the short term, a bad company can go up and great companies can go down. But over the long run, investing in great companies usually pays off.
For instance, Facebook stock is priced at $38 at its IPO. After six months, the stock became $20. At that point, investing in Facebook seems a bad investment. Today, Facebook stock is now around $200 per share.
Being down on a stock on the short term does not make anyone a bad investor as long as you focus on the long term. If you’re strategy is day trading or short term trading, then it is a bad decision.
But for most people, long term investing is the way to go. Short term gains or losses does not matter that much. But after 2 years or more and a stock is down, it could be a bad investment.
After all, some of investments is going to be bad. The key is to have more successful than bad ones over the long term.
As you gain more experience, you’ll get used to the short term market fluctuations.
2. Diversifying Too Much
We are taught that diversifying is good to limit risk, and it is. But sometimes, we tend to over diversify.
A person can sometimes buy a stock for the sake of diversifying, without researching enough of it.
At the end of the day, we have to put our money on companies we believe in. Buying 30 or more stocks on a small capital seems like over diversifying.
It is hard to understand a lot of stocks and believe in all of them. Also, risk in inevitable in the stock market. For most people, around 10 stocks is more than enough.
If you bought a lot of stocks, it seems better to just invest in an index fund. For example, a S&P 500 index funds includes 500 different stocks in it.
At the end of the day, it is better for us to invest in companies that we understand and truly believe in. Here is a quote from legendary investor Warren Buffet on diversification:
Diversification may preserve wealth, but concentration builds wealth.
– Warren Buffet
3. Lack of Diversification
Putting all of money in only 1 stock can make your portfolio more volatile. If your one and only stock have some unexpected problems on their business, your entire portfolio will go down.
For the most part, diversification does not matter that much on small capital, especially $1,000 or less.
Diversification matters with larger sums of money. Also, it is a good practice to diversify when starting, but not over diversify.
Diversification matters when buying stocks on different industries. Buying 3 stocks on same industry is not really diversifying.
4. Fear of Missing Out
Fear of missing out, also known as FOMO, is when a person purchased a stock just because it goes up a lot, without doing any research on the stock.
When I was a beginner, I fell into this. The stock is up a lot, so I purchased. I am so anxious of holding that stock and watching everyday its stock price.
At the end of the day, I only loss a little money by luck. I sold it because I need the money and after a week, it go down a lot. Once in a while, I’m always tempted of buying a stock because of FOMO.
To be fair, it is not always FOMO when you buy a stock that goes up a lot. What makes it FOMO is when research is not done on the stock.
When you like the company, the price of the stock, and future of the company, then it is not FOMO.
Fear of missing out is common to beginner investors and it’s fine as long as you learn from it.
That’s why its advisable to start with little money in investing. As you gain experience, you can confidently invest more money in the stock market.
5. Panick Selling
One of the most common mistakes beginners make is panick selling. When a stock goes down a ton, we feel negative emotions which leads to panick selling.
It is important to stick to the plan whether it’s long term or short term investing.
For short term traders, it is a failure when stocks go down. But for long term investors, it is actually an opportunity when a stock go down.
First, it is an opportunity to dollar cost average. For example, let’s say you bought a stock at $100 per share. When the stock go down to $80 and you bought the same number of stocks, your cost becomes $90. When a stock rebounds, you can have more gains.
Of course, this will only be successful on great companies, that’s why having the right amount of information is important. For the most part, google the “10k” and the name of the stock. That should give you a lt of information on a stock.
Stocks are cheaper when stocks go down. As long as the fundamentals are the same, it is a buying opportunity.
In fact Warren Buffet likes stocks to go down.
When stocks go down, it’s good news.
Warren Buffet CNBC Interview
When stocks go down, it’s like a discount. Would you buy an asset when it is cheaper?
6. Focusing on Dividends too Much
Dividend investing is great. In fact, most beginners should start at dividend investing. But only investing on stocks with dividends can limit your options.
There is just a lot of companies that do not pay dividends. And not considering such companies can be a lost opportunity.
For example, companies like Amazon and Google did not pay dividends. Also, Apple did not pay dividends for 17 years.
Of course, not all companies are successful, but not considering companies that do not have dividends limits your choices.
Another tip on dividend investing is make sure that their earnings are enough to pay dividends. Companies can actually cut their dividends whenever they want to.
For simple formula, make sure that 100 / dividend yield is more than PE ratio. For example, a stock pays 5% dividend yield and have PE ratio of 15.
100 / 5 = 20 which is more than PE ratio of 15
The bigger the difference the better, but if the PE ratio is bigger than the result, it is a red flag.
Another way is by searching their payout ratio. On payout ratio, try to make sure that it is less than 100% and not negative.
7. Caring Too Much what others think about a Stock
Another common mistake is caring too much on other person’s opinion on a particular stock.
The stock market news can sometimes be over positive or over negative. When stocks go down, everybody writes bad artickles regarding a stock. When stocks hit all time highs, everybody becomes positive on the stock market.
I remember Tesla when its share price was low, most articles predicts it will go bankrupt. And full of negativity all over the internet. When the stock gone up, everybody was raising their price targets to unbelievable amounts.
Every stock has a positive case (bullish thesis) and negative case (bearish thesis). Most people focuses too much on one side or the other. In my opinion, it is important to listen to both opinions and decide for yourself.
Also, nobody cares about your money more than you do. Make sure to not buy a stock just because someone told you it is a great investment. Doing a quick research on a stock usually pays off.
As a beginner, it is hard to decide what stocks to invest in that we can look for someone else to make investments for us. But at the end of the day, it is your decision to make.
It is okay to make these mistakes as a beginner with little money. The key is to learn from mistakes and be better.
8. Investing Borrowed Money
Investing in margin usually happens after some success in the stock market. For example, if a person gained 30 percent on a stock, it’s really tempting to invest in margin to double the returns to 60 percent.
Investing in margin is not advisable, especially for beginners in the stock market.
“It’s insane to risk what you have and need for something you don’t really need.”
– Warren Buffet CNBC Interview
Most people lost tons of money in margin trading. When someone lost a lot of money in stocks, he will have a pressure to recoup the money by taking more risk.
That’s why it is important to take losses sometimes and let go. The bright side is you can gain more experience and learn from mistakes.
9. Buying a Stock Outside on Circle of Competence
It is important to know exactly what the business of a stock is. If you’re just looking at a stock as a price that goes up or down, that is basically gambling. Also, having no knowledge about a stock can give you bad returns on investment.
That’s why Warren Buffet emphasizes to invest in what you know.
“Everybody has a circle of competence. The important thing is not how big the circle is. The important thing is staying inside the circle.”
– Warren Buffet
Everybody has some idea about a business. Also, a person can expand his or her own circle of competence through experience.
Investing in stocks that you do not know can give you wrong habits in investing. As a beginner, building habits in investing can really payoff.
10. Buying High and Selling Low
This seems like an obvious one, but let me explain.
When stocks go up, most people tend to think that it is going to go up more. Thus, buying high.
When a stock go down, most people become fearful because we think that it is going down more. Thus, selling low.
Instead, the right thing to do in stocks is to take advantage when stock prices go down.
As Warren Buffet put it, be fearful when others are greedy and be greedy when others are fearful.
Buying low and selling high is the way to go.
11. Buying Penny Stocks
Penny stocks can be a great way to have great results. After all, a $1 stock can have 100 percent results when it became $2. But most penny stocks are not worth it.
A lot of penny stocks did not have to disclose their financial information. Most penny stocks that is not on NYSE can make up their financial status.
Thus, it is hard to trust penny stocks. The fix to this is to only invest to companies with at least $500 million in market cap and above.
If you chose to try penny stocks, I suggest to start with little money like $50 on a penny stock. After a month or two, see what happens to that investment.
At the end of the day, investing some money in penny stocks is risky.
11. Not Buying when Stocks are Cheaper
When a stock go down, it is an opportunity to buy stocks at a discount. After all, the purpose of investing is to buy low and sell high. When stocks go down, it is an opportunity to buy low.
Instead of complaining about market fluctuations, try to take advantage of the situation. When stocks go up, great. When stocks go down, look it as an opportunity to buy stocks at a cheaper price.
To do this, always have some cash on the side.
12. Not Looking at Balance Sheet
The balance sheet is one of the most important financial statements. It can tell you how much extra cash a company has.
At first, it might seem terrifying because of lots of numbers in there. The important part is to pay attention to assets and liabilities. If current assets is less than current liabilities, it is more likely a red flag.
Not looking at a balance sheet can haunt your portfolio after some time.
Companies go bankrupt when they can’t pay their liabilities. If assets is much more than its liabilities, then it is great.
A company that has a bad balance sheet (more liabilities than assets) and losses money is more likely to have some financial trouble in the future.
13. Messing Up with Options Trading
Options trading can give you incredible gains. Returns of 5 times or 10 times your money is achievable in options trading. At the same time, it is more likely to lose all of your capital on options.
Most beginners should not mess around with options. After a couple of years, that’s when you can consider options.
Options trading can be a great tool for experienced investors. But for most beginners, it is suggested to stay away at options
14. Investing Too Much Money as a Beginner
Beginners do not have much knowledge on investing. The number 1 most valuable thing on investing is experience. But how can you gain experience?
It is really simple, by starting at some point. Every one was once a beginner. Investing is exactly the same.
It is important to start with little money as a beginner in stocks. That way, you can gain experience by risking little money.
Most beginners mistake is investing a lot of cash at the beginning without any idea at how the market works.
Gaining 10 percent on a $100 k is much better than gaining 10 percent on a $10 k capital.
The thing is, it is hard to make money in stocks as a beginner and it is not guaranteed. When you lost a lot of money in stocks as a beginner, you can get scared of investing again in the future.
I totally suggest to start with little money and slowly put more money as you become comfortable investing.
15. Giving Up Too Early
This is probably the most common one. After a couple of months of losing money, it can be emotionally draining.
Beginners are more prone to making mistakes in the stock market. There is just a lot of investing strategies out there. It is ideal to learn from mistakes and not do them again.
Most people give up too early on investing in stocks. Losing a lot of money can certainly push a person out of the market. That’s why starting with little money is key.
Experience is probably the most important tool to be a successful investor. The experience of seeing your own stocks go up and down can teach you a lot. Actually investing is different from just listening about stocks.
After a year or two of experience, you can be a much better investor than when you started. If you are a beginner, try to invest little by little.
