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This guest post is from Tony at Trading Slugger. This article contains the opinions of Tony and Tony has some great investing advice. There may be one or two minor points that we differ on, but I want you to have his perspective. I know you will get value out of this article! Enjoy…
Investing is not a science: it is not possible to put your portfolio on autopilot and just watch your money grow, Grow, GROW.
There is no one fixed, guaranteed path that leads to investment success.
However, there are certain paths that will lead to guaranteed failure.
Before you know what to do, you must first know what NOT to do.
I’m going to go over 4 common mistakes the investors make…
1. Buying on the Dip, All the Time
Do you know why “just buy the dip” is the favorite strategy of every passive investor? Because it’s easy! There’s zero judgement involved and you don’t have to use your brain at all! Stock price falls = just buy the dip! People love to say “just buy the dip” because:
- A) It makes them sound like investment gurus as if they know a secret (just buy the dip) that others don’t.
- B) It works sometimes!
Now buying on the dip isn’t wrong: it’s the best way to make money in a bull market. Like Warren Buffett said, most of his money was made by being right and sitting tight. Don’t trade in and out of a bull market in stocks. When the multi-year trend is upwards, buying the dip means that you hold stocks as the general market goes up. In other words, “buy the dip” is profitable if the market is going up.
HOWEVER, you cannot buy the dip all the time. Doing so is just being plain old lazy. What happens if the market enters into a prolonged bear market? People who just “buy the dip” will get their behinds handed to them.
Let me give you an example…
The U.S. stock market was doing great in the first half of 2007. By November 2007 the stock market had already started falling, and of course some investors were all over themselves “buying the dip”. Well you know what happened next? The stock market crashed for a year and a half. Of course, all these “buy the dip” investors magically became “long term” investors who didn’t care if the fell or rose.
Well it took over 5 years until the stock market reached the price level at which these investors had “bought the dip”. Imagine that – 5 years of making $0, and that’s assuming they didn’t sell their stock at the bottom of the market crash in 2009.
You cannot blindly invest and pray for the best. Investing still requires some judgement, and for those who just want to buy the dip, you need to know if the market is still in a long term bull market or if it’s about to enter a bear market.
2. Listening to the “Gurus”
I’m no “guru”, nor do I pretend to be one. I’m just a trader – that’s it. A lot of people want to sound like geniuses so they go on CNBC and start sprouting investment ideas off the top of their head.
The reality is that a lot of these “gurus” are just scams. Gurus start sprouting all over the place when the market is in a bubble; after all, everyone who’s buying stocks is making money in a bubble. The “track record” of these gurus has nothing to do with their brains, but everything to do with the stock market as a whole. A rising tide lifts all boats.
Tips from gurus work great (because all stock prices are rising) until the stock market falls. The funny thing is that these “gurus” don’t listen to their own advice. If they did, they wouldn’t be talking to the media, they’d start an investment manager firm themselves and become billionaires!
3. Being Unable to Distinguish Between Investing and Gambling
I know that there is a certain thrill when you send in an order to buy X number of shares of a certain stock. There’s always a rush of adrenaline that’s associated with investing.
The problem with many investors is that they invest for “excitement”. There is a crucial difference between investing and gambling. Investing requires cold, hard logical analysis. There is supposed to be no excitement to a rational, logical investment decision. You’re investing to make money, not for the thrill of investing. Gambling does not incorporate logic.
4. Buying Penny Stocks
Penny stocks are the worst things that you can possibly invest in. Yeah I know that a lot of penny stocks promise “1000% returns in 2 days!”, but let’s get serious here. What are the odds of that happening? One in a million? Most penny stocks are just fly-by-night operations that don’t even have a serious business model.
Like I said, investing requires rational, logical analysis. Do not gamble. Investing in penny stocks is the same as playing the slot machine.
Beware of these mistakes the next time you invest.
The key to profitable investing is to not lose money: if you lose 50% if you’re money, you’ll need to make a 100% return just to break even.
Avoid these deadly mistakes at all costs.