Top 10 Mistakes Investor’s Make

June 12th, 2007

For the purpose of this article please note that we are talking about stock investor’s, not day traders. 

1. Invest With Small Sums of Money

Sometimes you’re much better off waiting to have some more cash on hand before investing.  Brokerage fee’s typically range from $50 to $10 per trade.  Obviously, it varies and can be much higher or lower depending on the sums of money being invested and several other factors.  Far too often I see some young humanoid save $250 or $500 and ask, “How can I invest this?”  If your brokerage fee for each trade is $20, and you try and invest $250, you will lose 8% of your money to fees! That can take a year to recover and that is without factoring in the risks involved when investing! 

Solution: Well, the truth is, perhaps you should wait until you have some more money kicking around.  You should wait to have between $1,500 and $2,500 minimum before investing in a stock.  There are other investment products that have no trading fees that you can use in the meantime.  Just remember, brokerage fees hurt your return on investment.

2. Too Many Trades

Okay, this happens WAY too often.  Pretend for a moment that you’re just starting your investment portfolio and you only have $6,000 invested in four separate companies in equal amounts of $1,500.  Let’s say you buy and sell one stock per month with a quarter of your money.  That would mean that you are doing two trades per month, one trade is to sell the stock you have and the other trade is to buy a new stock.  With brokerage fee’s hovering around $20 that means that you will have spent $40 dollars a month in brokerage fees.  Multiply that by 12 months and you will notice that you have spent nearly a third of your $1,500 investment, $480! In terms of overall portfolio, this will cost 8%.  With long term stock market gains of approximately 11% per year, trading too often will definitely hurt.

Solution: When you decide to invest in a company, INVEST in it.  Pick a company you believe will do well for the next 3 to 5 years and stick with it as long as the fundamentals remain the same.  If you must sell, then by all means sell.  Just don’t make a habit of buying and selling. Buyer’s remorse isn’t fun.

3. Pulling the Trigger Too Soon

The price of a stock you’re interested in is going up.  You watch and it continues to go up.  Out of fear that you might not get it at a good price, you JUMP in and purchase some stock.  Two weeks later the stock has a massive pullback and you’re in the negative.  Sound familiar? Even Nabloid’s make this mistake .

Solution: Watch the stock for a few weeks or months.  Determine where the trading range is.  Buy on a pullback when the stock is cheaper than normal.

4. Don’t Know the Company, Industry, or Do Any Due Diligence

A friend whispers a stock tip in your ear.  You do five minutes of research and find the company has a neat story.  So you buy.  A few months later the stock is down a lot, and you find out that it was just a ‘pump and dump’ scheme where the stock is hyped up by people to get more investors in at higher prices.  Guess who is selling the shares you bought?  Probably someone affiliated with the people hyping it up to be the next biggest thing.

Solution: Do your own due diligence! Research the company in-depth.  Find out about the industry trends and make a researched decision.

5. Using a Stop Loss

I learned this lesson the hard way.  When setting a stop loss, you are advertising your exit point to everyone with L2 detailed quotes.  They then use this information to try and get the shares when they want. 

Solution: Don’t use stop losses! 

6. Not Using the Best Broker Possible

Not all brokers are created equal.  Even many of the big brokers like CIBC’s Investor’s Edge do NOT have L2 detailed quotes! This puts the investor’s at a disadvantage to other investor’s with broker’s that do offer L2 quotes.  With detailed quotes you can see what the bids and asks are for a stock.  This is extremely useful information for determining an entry or exit point!

Solution: Do your research on which brokers are good and offer the services and information you need.

7. Over-diversify, Under-diversify

We’ve all heard it.  Diversify to keep your money safe.  Are we investing to make money? Or investing to keep money safe? Over diversifying will so closely tie your returns to the market that it will be almost impossible to beat the market average because you will be statistically linked.  Under diversify and you are exposing yourself to a lot of risk - that is, if you don’t know the company well enough.

Solution: Find a happy medium for you.  As a Nabloid, I prefer a little extra risk so I can get a little extra return.  Between 10 and 20 companies is a happy medium, though I often stay under 10.  It’s only risky if you didn’t do enough research to know what you’re getting yourself into.

8. Who Cares Attitude: Professionals Will Do It for Me

It fascinates me that so many humanoids don’t know anything about money or finance and yet they work their entire lives to earn money. Ever meet an investor that just buys mutual funds and let’s the “experts” manage their money? Of course you have, we all have. If the experts do such a good job, why are you still working?  We know their excuse too; “I’m not interested”, “It’s too boring”, and “I don’t understand that stuff.”

Solution: It may surprise you, but EVERY ONE is an expert at spotting a good business from a bad one, and that is all investing really is!  Investing can be as easy as you want it to be.  Just act like a business owner and ask yourself, would you buy this business? You work for businesses and you buy from businesses, you know more than you realize.

9. Buy High, Sell Low

You can’t help it, you’re just a human.  You bought a stock and got buyers remorse when you realized you paid a high price for it.  The stock seems to be going down and everyone else is selling so, herd mentality kicks in and you follow suit and sell low.  Ouch.

Solution: Sometimes we pay too high a price for an investment.  IF it is a good sound investment, because you did your due diligence, then you might be better off just waiting the pullback out.  If it was indeed a good investment it will come back up.  If it wasn’t, then read mistake number 4 again.  Geez.

10. Buy and Hold… FOREVER

A friend of yours read a book on Warren Buffett and decided to buy some investments and hold them.  The investments go up really nicely over time.  Fifteen years passes and your friend has a nice small fortune.  Then he dies, or the company fundamentals change and the company goes under.  Either way, your friend either dies a rich man who never got to spend a dime of his money or he dies a poor one who never got to spend a dime of his investment.

Solution: The buy and hold strategy doesn’t necessarily mean buy and hold ’till you die.  It means buy and hold the investment long enough to see your money at work.  Keep an eye on the investment.  If the company fundamentals change and you no longer think the company will do well, then it is time to sell.  After all, why invest if you never plan on using the money anyways? Your money should work for you, so you don’t have to! If the investment is giving you really nice dividend cheques, then keep it for the income, but at least your investment is working for you! 

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