Very often, we come up with a solid plan ready to conquer the world and dive head in eager to grow our portfolios. No matter how ready we are, we are bound to make mistakes.
Being aware of the pitfalls will decrease the likelihood of you committing the same mistakes too.
In this article, we will be guiding you through the entire process step by step, highlighting the common mistakes most investors make while investing.
Being ill-prepared. After seeing how your friends are making big bucks off the financial market, you may feel like there is absolutely no need for you to be spending hours and days of your time researching the market and honing your skill.
As the saying goes, if you fail to plan, you plan to fail.
The crowd is lazy, speculative and extremely emotional. If you follow the crowd, you won’t see any results over the long run.
Everyone has emotions, and these should be placed aside in the realm of investing. Rational thinking under high pressure is the key to making successful investments.
Having a game plan will largely insulate you from the psychological influence of the market if you stick to your plan.
Entering with the wrong mindset. Even with a plan, if you invest with the wrong expectations, you will end up giving up on the value investing approach.
While you may understand that it is necessary for value investors to underperform in the short run to beat the market in the long run, do not underestimate the allure of following the ‘money-making’ crowd when times are great.
If you expect value investing to make you lots of money in a short time, you’ll be very disappointed.
Also, a value investor should always treat holding a stock as holding a stake in a business, not just a piece of paper with a value that ticks up and down. If you think of your investments this way, you will not see any meaning in speculation.
Not sticking to your plan. Having a plan provides you with a clear direction and system to investing. It reduces human error as we are often subjected to irrationality during market extremes.
However, it is still possible for us to abandon all preparation and consequently make the most regrettable choice ever.
To be aware of such a possibility reminds you that having a plan doesn’t make your decisions infallible. The one who will be executing the trades will still be you. Whether you stick to it or not will also be up to you.
This does not mean that you should be overly rigid in your investment philosophy. Your game plan should be constructed on a few levels.
Broadly speaking, the foundation of your game plan should direct you towards the attitude you should adopt and the philosophy you believe in. This, under no circumstances, should change drastically unless you completely lose faith in the value investing approach.
On the secondary level, there would be the specific actions and rules that you’ve set to optimize your portfolio. This system is set in place to reduce human error due to emotions and poor judgement. Throughout your investing journey, you should constantly improve on your approach and refine them. Being adaptable within the constraints will boost your learning and returns over the long run.
Obsession with gains. We have a tendency to over-glorify and celebrate our successes and do everything it takes to forget our losses. It almost as if it stings to revisit the past mistakes.
This upward bias will inevitably cloud our judgement as we slowly become blind to the weaknesses of our ‘winners’. If we begin to have any emotional attachment to our ‘winners’ and ‘losers’, you will find it more and more difficult to be impartial in your judgement.
A company you held has probably performed really well for the past 3 years and by your estimate, it has exceeded its supposed intrinsic value. How can you then bear to offload a success story if you have fallen in love with the stock?
Refusal to admit mistakes. As briefly mentioned above, we are naturally averse to regret. When we make a mistake or when things turnout unexpected, we are quite to attribute this failure to external factors.
We believe that we are always in the right and that lady’s luck was just not on our side. The implication is that since you don’t admit your mistakes, you will never find out what your mistakes were and you will never learn from them.
Needless to say, you will fail to learn and improve your investing skills.
To conclude, the most important thing to take away from this article is to have a game plan in your head before you begin investing. Like the rest of the market participants, know that you are also a human prone to making the same psychological mistakes as well.
What differentiates you from the rest is how eager and open you are to constantly learn.
Interested in learning more to prepare yourself when it comes to investing in greater depth? We have shortlisted 3 top articles that would help you do so!