Hey everyone, Toni here. In this blog, we’ll be talking about mistakes. Or, more specifically – how to avoid them. Because let’s be honest, nobody likes making mistakes, right? I’ve got a neat list of 12 tips that will help you minimize the chance of making costly mistakes when approaching the Stock Market with a long-term investing mindset. If you like these types of tip compilation blogs, please make sure to let me know by hitting that like button or leaving a comment below. And, of course, don’t forget to subscribe for more fresh investing content straight in your inbox! Check out my other blogs such as, “How I Made £6300 By Investing £815 In Tesla“.
So, Let’s Dive Right Into How to Avoid Mistakes On The Stock Market
We’re going to cover:
- Be realistic
- Don’t feel like you’re married to your stocks
- Diversify your portfolio (within reason)
- Diversify your approach
- Bad CEOs
- Don’t ignore the balance sheets
- Big dividend yields don’t make a great stock
- Don’t sell too early
- Day trading
- Cryptocurrency
- Margin trading
- Options
Be realistic
The first one is really simple:
- Don’t fall for the hype trains.
- Just because you’re really optimistic about a company, doesn’t mean that it will succeed.
Just because someone keeps talking or writing about how great that stock is, doesn’t guarantee that you’ll make a good return. - You care about numbers and concrete evidence. You care about balance sheets, income statements, reports, and CEO presentations. You care about past performance. You care about the target market and the products.
- This is where your hope should come from in the first place.
- If these things aren’t up to par, then you might be putting your hope in the wrong company.
- If hope was all it took to make a company succeed, then all of us would be multi-billionaires.
Don’t feel like you’re married to your stocks
A lot of people struggle with letting go of stock if things stop working out. And there can be a lot of reasons for this. There could be shifts in management, really poor numbers, product quality dropping, competitors taking over the market.
Whatever the case.
If things just aren’t working out anymore, it’s time to move on. I know that letting go can be difficult, especially if you’ve been in stock for a couple of years. But if it’s not showing any signs of improvement, if your money is better spent elsewhere, just move on.
Don’t allow yourself to get stuck with a bad stock for silly reasons!
Diversify your portfolio (within reason)
Aim for a balanced and well-diversified portfolio. Naturally, you don’t want all of your eggs in one basket. But you also don’t want to spread your money (and time) too thin. If you have £100,000 in your account, you don’t want to go and buy 100 different stocks. I mean, you could do that. Some people do that. And it’s just .. silly. It’s unsustainable. It’s also very unrealistic to find 100 great companies. Even if you have 24 hours per day, 7 days per week, completely free. Even if investing is all you ever do.
Why? Because these companies aren’t going to be equal.
There’s always going to be “the best” company, then the top 5 or top 10, top 15, then the rest. These companies would be the ones you really believe in and the ones who have really great balance sheets, moats, management, and everything. They would be your “best choices”. So … why would you spread your money so thin, over like 50 other businesses, instead of investing them in the good ones that you’ve already figured out?
Under Diversification is bad, because if one of the two stocks you’re holding fails, then you’ve lost way too much. The key is balance and diversification. I personally aim for anywhere between 8 and 13 stocks.
Diversify your approach
Growth, Value, and Dividends
The stock market offers three main investing … disciplines.
- Growth, where you look for stocks that are rapidly growing.
- Value stocks, where it’s all about the valuation, business models, and safety.
- Dividend stocks, where you get decent dividends, but also stability.
And that’s great because it allows you to take a varied approach. It’s just another type of diversification. You’re investing in different kinds of stocks by using different strategies. You’re still going for the long term, but the reasons are different and your approach is a bit different as well.
Sadly, a lot of people just pick one “discipline” and never try anything else. Don’t be one of these people.
You miss 100% of the shots you don’t take.
Sometimes, the good growth stocks, for example, might be super overvalued, and, even though you haven’t used up your investing budget for that period yet, it feels like there’s nothing to buy. Well, there actually is, you just have to look at the other categories.
Margin trading
Okay so, the best advice I can give you about margin is to … stay away from it. It doesn’t matter if you don’t know what it is or if you think that you’re “good enough” to leverage it properly. Beginners, veterans, it makes very little difference here. 98% of investors should just never consider margin as an option.
Margin means that you take on debt. You then use this money to buy more stocks. In theory, it sounds great – you can “quickly and easily” get a hold of extra cash to buy that one stock that’s looking super-hot right now. What could ever go wrong?
A lot of things. And, more often than not, they will go wrong!
Let’s say that you’ve got, maybe £20,000 in your account and you’ve got no cash on hand. Perhaps you’re going through a rough period, or maybe you’ve just hit your self-imposed investing budget limit (if you don’t know what I mean, I HIGHLY suggest that you watch my video on the subject. I’ve talked about this one in-depth and I believe that every single long-term investor out there can benefit from implementing this budgeting rule.
Anyhow, back to our example.
So, you’ve got no cash on hand, and your account just has the £25,000. Still, there’s this stock that you really, really like right now. And it’s super undervalued. The “solution” is to take a margin.
You’re essentially taking out a loan, using your current stocks as equity.
But margin interest rates are horrible. The majority of margin loans will ask for 8% or more interest. And while that might not sound too bad, you have to remember that the stock market on average will rarely go up by more than 7 or 8% per year. For this to not be a total rip-off, your stock has to do incredibly well. Sadly, most of the time, it doesn’t work out.
Then, if your stock starts dropping and you can’t deposit any more money, the broker has the (legal) ability to force-sell your position. They don’t even have to contact you. Yes, that’s right. Please make sure to always read the legal agreements carefully!
Personally, I’ve never fallen into the margin trap, and I will wholeheartedly advise you to stay as far away from it as you possibly can.
Options
Options are not suitable for beginners. Or for experienced investors for that matter. If you ask me, most investors are going to be much better off staying away from options forever.
And yes, the average “success rate” here is very similar to people’s success with margin. Options trading is complicated.
Most options contracts will expire worthlessly. And all the people who buy these types of arrangements just end up losing 100% of the money. This is nothing like the long-term investing, where if the price drops for a while, and it looks like you’re at risk of losing money, it will go back up later. If your options contract expires worthless, you just lose the money.
Some time ago, I signed up for a course about options trading, and there’s my takeaway:
Stay away from options.
Bad CEOs
CEOs can make or break a company. I mean, just think about it. Some fantastic person like Elon Musk, Lisa Su, or Steve Jobs comes around, and the company suddenly becomes the next big thing, right? Well, if a horrible CEO takes the reins, the exact opposite can happen. And you don’t want to be there when it does, okay?
Never disregard the CEO. The financial statements might look great, the product and the moat might be there, but if the CEO is bad, then just stay away from the company.
A lousy CEO is more than capable of driving a company into the ground, especially if they’ve got intense competition.
So, do your research, look into the CEO, and if they aren’t up to snuff, just stay away from the company. That’s all there is to this point.
Don’t ignore the balance sheets
This might sound a bit silly, especially if you’ve been around the investing scene for a while, but yes, I am serious. There actually are people who disregard the balance sheets.
And it happens more often than you think.
People go in and are all like:
- Oh, I love the products or services of this company.
- I find the CEO inspirational.
- Okay, time to give them my money.
This is like … the last thing that you’d ever want to do.
Or, well, if things were going well for that company and if it’s been hyped up, even experienced investors can make this mistake. I don’t understand why they ignore the principles that made them successful, it happens. And it’s always a massive mistake.
The balance sheet is what shows you the capital structure of the company.
You always want to know:
- What the company has in cash and cash equivalents.
- Short and long-term investments
- What it has in short and long-term debt.
Or, in other words, you want to know if the company has what it needs to succeed.
Never disregard the balance sheet.
Big dividend yields don’t make a great stock
Don’t fall for big dividend numbers.
And, don’t get me wrong here. I’m not trying to say that dividends are inherently bad. Just because a company offers dividends doesn’t mean that it’s a bad company to invest in.
Just because they offer a high dividend doesn’t guarantee that their stock will continue going up or even stay around the same price. Not to mention that they can stop paying such a high dividend in the first place.
Then, there’s also the part where most big dividend yield stocks just … don’t work out. If they’re offering something like a 10% dividend, they’re usually making it just to attract more investors, because they were having some problems.
How do you avoid this?
You just look at the numbers.
Check the balance sheet. Check the income statement. Pay attention to the cash flows.
Trading based on momentum is silly
Don’t fall into the trap of selling too early.
If your stock suddenly jumps in price, don’t rush off to sell it.
Sounds simple, right?
We’re long-term investors, yadda-yadda.
But you’d be surprised by just how many people will rush into selling as soon as they see the price go up a bit. Yes, it’s exciting to see your stock jump by a decent percentage. And, all of a sudden, you get that itch to sell. You could make a great return with very little time involvement. What’s there not to like, right?
Well, selling like that will usually just make you sad in the long term. Because, well, good stocks tend to go up and up over time. They don’t just spike for a second and then crash forever.
Look at Tesla, for example.
A lot of the people who initially got into Tesla when it was really, really cheap, sold as soon as it went up initially. Sure, they made some 30%-50% return, but look at what’s the price of Tesla stock today vs what it was a couple of years ago. Even just over the year, Tesla stock went up by a few hundred percent. This is what I mean, guys.
And yes, I know that there are strategies that revolve around doing just that – going into a position with the intent of making quick money and then moving on to a different stock or waiting for this one to drop. There are all kinds of strategies and approaches out there. And some people make a lot of money with them.
But we’re not here to talk about short-term strategies. Long-term means looking at the distant future. We want to buy when the stock is undervalued and hold, preferably over a couple of years, until it becomes really overvalued. That’s when we sell.
Simple, right?
Day trading
Day trading is really complicated, and it takes a ton of time. The time which I don’t really have. I did go to a course about it (a really pricey course at that), and all I managed to pick up was how to read the charts. I mean, there definitely are people who can make it work, and they do make good money with it, but it’s just not for me. On the bright side, I did meet some really lovely people at the course itself and managed to make one great friend.
Still, I prefer long-term investing.
Cryptocurrency
We’re going to wrap things up with yet another hot take – don’t get involved in crypto. Not unless you know exactly what you’re doing, and you’ve got a lot of money to spare.
I did sign up for a course, and I quickly realized that it’s not the thing for me. It’s nowhere near as safe or stable as long-term Stock Market investing and it’s a lot more stressful.
Don’t trust me? Well, how about you trust Warren Buffett?
Mr. Buffett himself said that he prefers staying away from cryptocurrencies, because, in his own words “Cryptocurrencies basically have no value and they don’t produce anything”. He said that he does not own cryptocurrency and he never plans on getting into it.
Congratulations, you’ve reached the end of this blog. Yeah, I know, it was a long one. In my defense, we had a lot of things to cover. I tried keeping things as brief as possible, but I also wanted to give you guys some examples, instead of just stating something and moving on. If you prefer shorter blogs, drop me a line in the comments, and next time I’ve got something this long, I’ll make sure to break it up in different blogs.
I want to thank everyone for being here with me today and reading this long blog until the end. I really hope that you enjoyed it and, if you did, please let me know by giving me a thumbs-up. If you’ve got any questions or ideas, feel free to post them in the comments section or get in touch with me on Social Media – Facebook, Instagram, Twitter, Pinterest, or YouTube.
Thank you all for reading, and until next time:
Stay Green and Motivated!
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Recommended for further reading:
- The Definitive Book on Value Investing
- Stock Market Investing For Beginners: The Investment Guide
- Learn how to make more money and transform your life
- A Beginner’s Guide to the Stock Market: Everything You Need to Start Making Money Today
- A Plain English Guide to Thinking Globally and Investing Wisely
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- Passive income
- Silver & Gold coins
- Trading212
- Freedom24
- FreeTrade
- COINBASE
- Interactive Brokers
- eToro
(‘68% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you can afford to take the high risk of losing your money.)
