Before reading this article, it may help to know that most ‘seasoned’ investors still do make these rookie mistakes. These mistakes are simple but lethal to your portfolio. It may seem innocuous at first glance, but they steal your returns and expose you to huge risks.
What exactly are these pitfalls that make them so petrifying? They mostly revolve around having a poor attitude by being ill-prepared. Now, we will introduce to you the following 3 common mistakes investors make in the financial markets!
Returns, returns and more returns!
Virtually almost every non-value investor is a culprit of this and unsurprisingly so. When we first step into the financial market, our eyes are drawn by the allure of how wildly stock prices tick, imagining how it would be like if our wealth ticks up with it.
We invest because we want to win the market and profit. Naturally, we will be fixated on how much profit we can earn without caring about the downsides.
Counterintuitively, returns are drawn to those who care about it the least. Not to say that it doesn’t matter but to treat it as secondary.
Value investors who focus on dealing with the downside of the investment first consequently enjoy huge upside rewards later. We are able to identify investments with low risks and high rewards. This is seemingly paradoxical to the finance industry.
The crux of value investing is about capital preservation. It is fine to win less during the best times, but it is of the utmost importance to lose even lesser during the worst times. When all the nifty fifty stocks went bust after the dot-com bubble and many technology funds went down with it, our legendary value investor Warren Buffett emerged unscathed.
We want our stocks to always go up, never down. That is of course understandable. But what many do not realize is that for stocks to go up in the long run, any short-run stomach-churning plunges are only natural.
No one in the whole wide world is able to forecast what happens to the stock price of company XYZ tomorrow, next week or even next month. At best, we will only know that it would fluctuate. Not even the best and brightest expert covering the particular industry. This is how future works – uncertain. However, looking from a value investing lens, we are able to identify characteristics that increase our likelihood of getting some things right.
In the short run, noises may be present, and things may seem to be in our favor. However, in the long run, if our judgement was more right than wrong, the prices will gravitate towards the fundamental value.
Value investing is about tilting the game of probability heavily in our favor.
Fear and Greed
“If I don’t sell now, the market is going to crash tomorrow!”
“Hey, Bitcoin has increased by 200% and my friend is cashing in on his new condo at only 24 years old, I better catch the boat before it sails!”
Fear and greed, in other words. Value investing is about being a contrarian investor. We know how the market is feeling and as a result, why it is behaving in a certain manner. Hence, we act differently when inefficiencies exist.
However, the majority is drawn into the vortex of emotions of hope and despair. Their investment decisions are entirely motivated by what they see around them. It becomes all about what their brokers say, what their friends are buying and what the ‘experts’ on Bloomberg are talking about. There are even plenty of investment ‘tools’ that claim to measure sentiments by tracking what people tweet about and talk about on investment forums.
You pick stocks and invest because you seek to beat the crowd, not be the crowd. So if you are going to be so heavily influenced by what happens around you, trust us, it is much better for you to stick to a low-cost passive index fund.
Through the above three points, we hope that not only you will be more mindful of your own investment decisions, you will be able to identify more investment opportunities in the financial market as a result.
You now know that investors tend to ignore risks and focus on returns. They are impatient and emotional.
Chances are that you too are subjected to the very same pitfalls many commits. But now you have a huge advantage of being aware of them to craft your game plan and structure your investing process.
Be ready before you fight the battle! Now, you have no excuse.