Honestly, most people lose money in stocks. If you don’t want to fall into that statistic, you have to know what to watch out for.
Five of the most common culprits of stock market failure and how to overcome each… coming up!
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Investors make mistakes in the market all the time. That’s one of the reasons there are opportunities for us to generate out-sized returns.
In this post, we cover five of the worst and most common mistakes. (And I bet, even if you’ve see other lists like this, you haven’t heard #5 before…)
If you aren’t prepared for these, you should not have money in the market.
And if you haven’t already seen the deep dive video into the #1 mistake all investors make, you should check it out, because if you don’t avoid that huge mistake, you’ll be helpless against these five.
Massive mistake #1 is that most investors panic!
When you really think about it, on the whole, most of the time the market moves predictably. It’s relatively sideways, often with an upward slant. Because that’s only what’s happening most of the time (at least for the last several decades), that’s what we come to expect.
After a decade, we forget that markets go down too. Not in theory—I mean, we admit that it happens, obviously markets come down—but in practice, we don’t actually know or remember how that feels. We’re not prepared. And because it happens relatively rarely, we don’t know how to prepare. But when it does happen—when the market does fall—it can fall fast and hard. And even though that may only happen once every decade or so—each crash unpredictable and different than the last—that’s normal and should be expected.
Maybe you're right to panic...
Now here’s something other financial experts won’t say: I’m not going to tell you blindly that you’re wrong to panic. If you don’t know why you’re invested the way you are—if you don’t understand the reason underlying each of your investments—if you didn’t initially invest preparing specifically for the possibility of a crash… then maybe you should panic. Maybe you should pull your money out of the market.
Invest your time
In fact, you probably should right now and invest some time in understanding why you’re invested the way that you are. Create an investment plan that is prepared for come what may.
Also, if you want to supplement this post, you can check out the free course on this subject at Spicer Capital University. Its four hours of video content will help you overcome this huge mistake.
Calming profiting during inevitable chaos
Ideally, you want to be in a position of investment confidence as everyone else (...who isn't reading this blog or subscribed to my channel...) is panicking. You can observe the chaos with a cool head, because it is during that inevitable chaos we’re going to find some of our best opportunities to outperform long-term! (But that’s an exciting subject for another time…)
2. Giving In to Euphoria!
Massive mistake #2 is that most investors succumb to euphoria!
Also known as herd mentality, this one is similar to the first in that it is driven by our emotions. As we see others profiting from a market climb, it's hard to stay on the side-lines—even when we don’t understand or entirely disagree with the investment premise—a lot of people still jump in!
In fact, it’s the most disciplined investors who actually suffer more. Carl Richards, in The Behavior Gap, explains,
The terrible irony in all this is that the people who are trying the hardest to stick to their plans—the ones who hold out the longest before they finally capitulate—are the ones who end up getting hurt the worst because they buy nearest the peak. Once those hard-core holdouts give in, you know the top can’t be far away, because there is no one left to buy.
And in my mini-book, Stop Investing Like They Tell You, I posit,
The opposite is also true. As markets free-fall, it’s the “disciplined” investors who hold out the longest—and suffer the most—prior to their ultimate capitulation.
This euphoria/panic combination has knocked out countless investors.
3. Trading too Frequently
The third most common mistake is trading too frequently.
If you’re a day trader, the mistake becomes trading on emotion instead of your rules, but the negative effect on your long-term returns is the same.
I have a longer time horizon than a day trader, as most investors do. But when you become consumed by short-term fluctuations, you’re going to under-perform.
Not only will you under-perform, but you’ll lose more and more money to commissions.
Emotions strike again
Once again, your emotions work against you here. The solution is to have a plan before you enter each and every position. Based on what you know, play out every possible scenario in your head.
In his interview with Colm O’Shea, in Hedge Fund Market Wizards, Jack Schwager summarizes:
O’Shea views his trading ideas as hypotheses. [He] defines the price point that would invalidate his hypothesis before he makes a trade. And [he] then has no reluctance on liquidating that position.
Almost nobody does this. We could do an entire series on this practice, how you can do it, and why it’s a good idea. If you’re interested, let me know in the comments.
The bottom line is that investors who trade on emotion (which happens when you don’t prepare for it ahead of time) and worry too much about short-term moves end up making a lot of bad (and expensive) decisions.
4. Getting Emotionally Attached to a Stock
The fourth big mistake is getting emotionally attached to a stock.
I’ve actually heard some industry authorities recommend you invest in companies based on your emotional attachments to them. That is the complete. opposite. of what you should do.
That is… dangerous! Emotions have no place in investing. That’s what makes it difficult, because we are emotional and instinctual creatures by nature. But as you read my posts and watch my videos or do any deeper research into the subject yourself, it becomes obvious that human emotion, in some way, is the primary force impeding most people’s investment success.
Before you make the decision to transfer your money from cash to the stock of a company, or wherever, you need to have analyzed that investment and have a plan. You need to have rules in place. And then you just need the discipline required to stick to those rules.
But if you don’t—if you decide to skip this part—if you just take a position because you like it or for some other emotion-driven reason, you probably shouldn’t be trading on your own.
And that’s okay… don’t feel like you have to.
Now, that process I just outlined of emotionally evaluating each trade before it is made is deep and more advanced. But it’s pretty imperative to lasting investment success, so you can bet we’ll dissect every aspect of that further to make it really easy for you to follow and thrive. So stay tuned!
5. Speculating Instead of Investing
Investment mistake #5 is that most people are actually speculating when they think they’re investing.
- If you don’t fully understand why you’re invested in a certain way, you might be a speculator.
- If you don’t know when you plan to get out—if you’re just “playing it by ear,” you might be a speculator.
- If you heard a good idea, didn’t have time to research it, but took a position just so you don’t miss anything… you might be a speculator.
- If you just liked the prospects of a company’s product, so you bought some shares, you might be a speculator.
If you haven’t completed your own analysis of the company’s financials or you have no basis for any assessment of a fair value, you are speculating!
Far too many individual stockholders in the market have never gone through any sort of formal analytical process to come to an educated decision about the investment they’re considering. If that’s the case, at best, you’re speculating; at worst, you’re gambling. Both can be disastrous long-term.
I put together a short video series explaining the differences between investing, trading, speculating, and gambling. Especially if you hold individual stocks, or would like to, you should check that out.
So Many Potential Mistakes
Now, I want to hear from you. We just covered five of countless mistakes new investors make. What are some others you’ve seen or experienced yourself?
I hope this has been helpful for you as you start your journey to building your rapidly-growing, highly-diversified net worth. If so, be sure and stick around, because there is so much more to learn!