Core principle: To qualify as a financial investment the security must regularly return capital to the owner. Activities not meeting this principle are speculation or gambling.
With that out of the way, let’s get into it. My list of 10 investing mistakes you really want to avoid.
1. Take advice from people that don’t know what they’re talking about
Don’t take investing advice from your broke friend, cousin or co-worker with an opinion. When it comes to investing, long term results are the litmus test. Unless they’ve gotten wealthy doing what they’re suggesting, smile, listen politely and then discard what they’re telling you.
2. Listen to the Financial News
The talking heads don’t know which way the market is going any more than you do. The only thing predictable in the markets is volatility. Watch CNBC and other financial networks for what they are; great entertainment.
3. Buy Gold
Gold is not an investment. You could buy 10 million dollars’ worth of bullion today and 20 years from now it would only be worth more if someone were willing to pay you more for it. Other than the joy you received from staring at it in awe, no value was regularly returned to you while you held it.
In fact, it probably cost you money because you needed a big safe and fancy security system to protect it.
"Who’s the more foolish, the fool, or the fool who follows him?"
4. Buy Bitcoin
To quote the great Obi-Wan Kenobi: “Who’s the more foolish, the fool, or the fool who follows him?” To say that bitcoin makes “investing in gold” appear wise, should really say it all. The Dutch Tulip Mania, The Dot Com Bubble, Bitcoin. When all your friends and your pet gerbil are telling you that “you really need to get in on this bitcoin thing”, run. This is a perfect example of investing mistake #1.
5. Turn complete control of your money over to someone else
No one is going to care about your money as much as you do. Period. Regardless of their credentials, history, or promises, it is YOUR job to keep an eye on your finances. While it’s wise to get investment advice from those qualified to give it, the buck ultimately stops with you. Trust but verify. Even if you’re trusting someone else to manage your money, make use of free tools to monitor what’s going on.
6. *Sell* because the market is going down
Life is a repeating series of cycles. The tides, the path the earth takes around the sun and even our very existence. It’s a series of up and downs that we’ve grown to accept. Why then would you expect the securities markets to be any different? When the market corrects, stocks, houses, and other investments go on sale. Do you walk into your local supermarket and say to yourself “Cripes! The price of bread has tanked. I’d better run home and sell mine quickly!” It sounds ridiculous because it is.
7. *Buy* BECAUSE the market is going up
There’s nothing wrong with buying securities when the market is on an uptrend. But you should never buy them BECAUSE the market is on an upward trend. The difference is subtle but important. One implies a decision reached based on some form of analysis. The other is an emotion-driven manifestation of FOMO (Fear of Missing Out). Emotionalism in the markets is very detrimental (and expensive) for your portfolio.
8. Invest in things you don’t understand
If you don’t understand it, don’t put money into it. There are so many simple ways to make money in the markets that it really doesn’t make sense pursue unnecessarily complicated strategies. If the person presenting the “opportunity” can’t explain it so that it makes sense, either they also don’t understand it or they’re trying to pull one over on you. Neither is good.
9. Constantly stare at stock prices
I used to be guilty of this one. But one day I realized the most amazing thing. I went an entire week without looking at my positions and yet they were just fine. The market opened and closed without me being present for the opening and closing bell. It was most liberating. Unless you’re buying or selling a security, there’s no reason to spend time throughout the day looking at stock prices. Besides, that’s what limit and stop-loss orders are for.
10. Buy positions on margin
Want to go broke in a hurry? Get into the business of regularly buying stocks with borrowed money. To quote the great Warren Buffett, “it’s incredibly difficult to go broke when you don’t owe anyone money”. Even if the investment you’re considering is sound, it’s really difficult for an investment to work out long term when you’re borrowing money at 6% – 11%. There’s no margin for error and regardless of how smart you are, everyone gets it wrong at some point. I’ll conclude this point with another quote from uncle Warren in regards to buying stocks with leverage: “If you’re smart you don’t need it and if you’re dumb you’ve got no business using it.”
"it’s incredibly difficult to go broke when you don’t owe anyone money"
Do you have any additions to the investment mistakes list? Any disagreement with mine? Let me know in the comment box below!
A great FREE tool I personally use for tracking my portfolio is Personal Capital. When you click this link to sign up for your free account, both you and I will receive $20. Every little bit helps right?
Legal Disclaimer: The information provided and accompanying material is for informational purposes only. It should not be considered legal or financial advice. You should consult with an attorney, CPA or other professional to determine what may be best for your individual needs.
This Post Has 2 Comments
Everyone is looking for a shortcut to success. Investing is no exception. You offer some great rules to follow, and they’re endorsed by Charlie Munger, Investor Extraordinaire!
I find that most investing mistakes come from following the herd, investing in something you don’t entirely understand, or thinking you have an edge when you really don’t. Most of the items you list seem to fall into one of those camps.
You’re so right Riley. Crowd/herd mentality is a very dangerous quality to adopt. It will cause you to buy and sell securities at exactly the wrong times. The harder it is to do something, the most lasting power it tends to have – because you eliminate so much competition.
The most important lesson I’ve learned from following Munger is the importance of rational thinking. Simply stepping back and asking yourself “Does what I’m hearing make sense?” will prevent you from doing a lot of silly things with money.