Warren Buffett famously said about investing: Rule 1: Never Lose Money; and Rule 2: Never Forget Rule 1. New investors eager to try their hand in the stock market and other investment opportunities really have a plethora of options today. However, not every investment is going to yield interesting results. Some strategies will work and some won’t. If you just make fewer mistakes, you are likely to be more in profits.
While we all do learn from our mistakes, some may get disheartened after a loss and quit investing forever. And smart people don’t necessarily make mistakes themselves. They learn from others’ mistakes as well. Here are some common mistakes investors make, particularly early on in their investing journey. Be wary and avoid these.
Staying in the comfort zone
Traditionally as a society, we are big savers. And conservative investors. We love our fixed deposit (FD), gold, and real estate. We know the devil well and we are comfortable with it. Anything unfamiliar is out of the comfort zone. In some ways, it is good to stick to what you know well. But in many ways, that is an impediment to growth and success. Sometimes, the comfort is also in not doing anything with the money and letting it just lie there in the bank account.
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Those who invest exclusively in FD and real estate miss out on the growth opportunity equity gives. Heavy equity investors miss out on the stability that debt investing gives or the regular cash flows real estate can provide. And investors who let their money sit in the bank miss out on everything. Investors would greatly benefit if they get more inquisitive and innovative and explore options outside their familiar spectrum. It is outside the comfort zone where the magic happens, isn’t it?
Not staying invested for long enough / lack of patience
A healthy seed planted in rich soil and tended to carefully will yield results in time. The farmer has to weather the seasons, protect against risks and be patient. He cannot expect to enjoy a big yield if he harvests ahead of time or if he keeps replanting his saplings in different places every now and then.
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Checking account balances frequently, reacting to short-term volatility, abandoning long-term investment plans, etc., are some of the detrimental investing behaviours that impact wealth creation opportunities. Having realistic expectations, understanding the changes in the weather which is a natural phenomenon, and waiting long enough for investments to mature are behaviours successful investors exhibit. Patience is one of the most underrated and unused skills in investing.
No asset allocation and FOMO
When the crypto fever is on, all investments go to crypto. When equity markets are gripped by the bulls, all investments move to equities. When the bears return, all investments go to FDs. How many of you will stop being a doctor and become a software engineer when the IT boom happens? How many will change their partners when someone better comes along? When you won’t make such decisions for macro items in your life, why do that for micro items?
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Investors keep seeking the best returns, least risk, perfect liquidity, and tax efficiency for investments. But there is no single investment that can satisfy all of these requirements. Some assets give good returns but are risky. Some are risk-free but give moderate returns. Some are risk-free and give good returns but lack liquidity. And at different points in time, different assets may do well. If you don’t know which one will do well in the next 12 months, it is prudent to just invest in all of them. That way risks are in control and at least some part of your investments will do well most of the time.
Sticking with loss-making assets
When an asset is making a loss, it is probably an indication of something having gone wrong. Sometimes it makes sense to chop off a gangrened finger to save the limb. It would hurt, no doubt. Unemotional decision-making is a hallmark quality of successful investors.
Of course, Buffett said, “Buy the company, not the stock.” The amount of research professional investors do before they pick a stock in their portfolio is difficult to replicate by investors who buy on tips. When that is the case, it makes sense to buy only on momentum. Sell the losers and buy the winners. Value-picking is a very tough job.
Things go wrong all the time. It is a great idea to build strategies to identify the errors, learn from mistakes, cut losses and move on. Staying in denial can let you down.
Averaging down
If staying with loss-making assets is not enough, there are investors who go to the next level of foolishness of selling winners (booking profits, they call it) and buying losers (averaging down). The buy low, sell high idea is a great value-investing idea. In a tending to perfect market where information is almost freely available, finding undervalued stocks is like picking the needle in a haystack, tough even for professional, full-time investors. Novices trying to behave like experts is like amateurs getting into the ring to box with Mike Tyson. Empty bravado that can get you killed.
The bottom line
Investing can be very simple. But when it is simple, it is likely to be boring. One of the biggest mistakes many people make is to view investing as an entertainment activity. Investing has to be like farming. The growth may not be visible every day but one fine day it is all grown up and ready to be harvested.
First-time investors should begin with building emergency funds and purchasing all insurances. And when investing, stick to simple index investing or seek professional help to build a suitable portfolio. They should then invest regularly and enjoy the benefits of rupee cost averaging. After this, they should just let the magic of compounding happen. It will definitely happen for every single investor, as long as they don’t do anything stupid.
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