Five investing mistakes that beginners should avoid
If I told you stockbrokers make the worst investors, I have a hunch you wouldn't believe me.
Truth is, there was a longstanding joke on the sales desk when I worked in the industry that if one us 'stockbrokers' bought a stock on our personal account then the others should sell it.
The point is, for beginners, you might think the 'experts' who advise on shares know everything. No one can know everything, and you have the biggest advantage of knowing yourself and how you will react to share prices moving.
For the investor starting out, here are my five top mistakes you should try and avoid or at the least learn to manage as you become more a more experienced investor.
Here are some of the biggest mistakes we can all make.
1. Price is not value
This is the biggest error for most investors. They confuse the share price with the valuation of a share. The valuation of a share is dependent on the future growth in revenue and profits from the underlying company that has issued the shares.
It may seem completely illogical to new investors (and far too many so-called experienced investors!) that a share with a $100 price is a cheaper value than a share at $1. The price of a share must be taken in the context of the valuation, not the absolute number.
2. Beware the misleading charts
One of the worst mistakes you can make is looking at the historical price chart of a share you want to buy and saying to yourself "I can't buy the share; it has gone up too much". You can't see me, but my hand is in the air and I am guilty as charged.
I don't want to even think about the lost opportunities I had when CSL was at $50 and I thought it had gone up too much.
Luckily, I saw the error of my ways and learnt that great companies, or as they are called the "winning shares" can keep going up for many more years than investors ever forecast.
3. Fads are for fashion
In bull markets it is easy for the new investor's enthusiasm to be swept up into the hype of the latest new hot share tips. Be careful of shares that have been recently listed on the stock market, the price moves post listing do not mean they are a great investment or a bad investment.
Unless you know the company well, be wary of chasing the fads as once the traders move on, momentum can leave you disappointed and possibly sitting on a paper loss.
4. Don't panic when a share price falls
There is nothing scarier and enough to raise the blood pressure than watching the share price of the company you finally decided to buy go down.
It is normal to question your investing acumen and prowess if you buy the share and look in a few days and you are sitting on an unrealised loss. The share market won't do what you are aiming for straight away. If you have conducted sensible research, and understand that Mr Market can be fickle, you will understand that the sky is not about to fall in.
More likely than not, traders or other investors have a different view. That does not make yours wrong. Be careful not to react to short-term price movements.
5. Perfection is for the dreamers
For any golfers out there, I learnt more about how to play golf by reading Golf is Not a Game of Perfect than spending hours practising.
The bottom line is you will never be a perfect investor. No such being exists, neither human nor algorithm. Investing is about time in the market, not timing the market. It is about realising you won't make the right decision every time; you should learn to be humble and acknowledge 'lady luck' always has something to do with making money and don't despair if the market is not going your way for a week, or a month or a year.
That sometimes happens. But you should ensure you know the companies or the funds you are buying, as that understanding will help you ride out the share price volatility.
The reason I know these five tips is because, along my investing journey, I have experienced and learnt from every mistake. Even for some of the top 'experts' who advise, they can make mistakes. Remember never stop learning, enjoy the journey and accept when you made a mistake and move on.