I get approached by many investors asking what I think of such and such a stock or investment. Usually the theme is a familiar one and represents one in a long line of many mistakes beginning investors make whether starting out or those having been investing for a moderate amount of time only.
I have found few people new to investing make much money and the mistakes are many.
First off, some new investors obviously turn their money over to an advisor and there can be mistakes made there too. In speaking with a friend of mine last week, we had the conversation on when one might need an advisor and when one might not.
In my opinion, those that believe the market goes up over the long term could probably avoid the fees of an advisory service and instead just invest in some market index funds. For those wanting more active management or downside protection, perhaps a paid professional might be better. Most of all however don’t forget Warren Buffets two rules.
Rule one: Don’t lose money.
Rule two: Don’t forget rule one.
Novice investors also have a tendency to chase stocks. If it’s the latest and hottest stock, they are usually in or planning to get in. There is a reason the terms “smart money” and “dumb money” refer to professional traders and mom and pop investors respectively. Usually the smart money rides the wave up, the dumb money gets in way too late.
Beginners also tend to want low price stocks in order to buy more shares. There may be a bit of logic here but it’s the percentage moves that counts. Higher price stocks tend to move in large dollar figures while low price stocks tend to move in pennies but the percentages are similar.
Novices usually stay too long in a positions and rarely take profits in chunks. In other words, selling half a position to use the house’s money. Instead they are usually all in or all out. They may also suffer huge losses, unwilling to initiate damage control on a plummeting position until it’s too late. They may ride that train all the way to the bottom or even buy more stock in hope of averaging out. Bad medicine for sure.
Beginners usually won’t touch the boring dividend payers or large cap stocks. They are instead after fast profits and looking for doubles or triples.
They may play in the dangerous yard of options if they learn how they work. Even more hazardous to one’s wealth.
They usually know only the story of the stock and none of its financials or fundamentals. They often buy on a tip from a friend, co-worker or family member. They will also trade the same stock over and over, fall in love with a stock or think they can time the market based on what they feel in their gut or read in the news
Beginners may panic as the stock goes through the normal gyrations of its day to day movements. They expect to buy a stock and have it immediately go up and feel terrible if it falls as soon as they buy it. They don’t accept the fact that timing an absolute low is the holy grail of investing and rarely accomplished.
In conclusion I can usually tell an investors experience by the questions they ask and the stories they tell me. That’s the easy part. The hard part is trying to explain all the do’s and don’ts of investing in a brief conversation. THAT would take a whole series of classes, and by the way I do that too!
This article expresses the opinions of Marc Cuniberti and should not be construed as individual investment advice. No one can predict market movements. Investing involves risk. You can lose money. Mr. Cuniberti is an investment advisor representative through Cambridge Investor Research Advisors Inc. a registered investment advisor. California insurance license 0L34249