15 Common Investing Pitfalls

We touched briefly about common investing pitfalls here Here is
a more comprehensive list Some of it may happen to the more
experienced investors as well This serves as a guide for Novice
Investors:
Investing with debt You should not invest when you still
owe a lot of money in your credit card Credit card interest can
run to as high as 20% while in the long run, investing in the
market indices can give a 101 % return historically
Not Starting Now By now, you should have known that
compounding works its magic in longer time frame The sooner you
start, the longer time you let compounding do its magic and the
larger your savings will be at retirement age
Investing based on stock tips Stock tips are just that,
tips It is supposed to help you invest but not giving you a
shortcut Doing your own due diligence is an absolute must even
when you get stock tips from the so-called professional
Investing for the short-term The easy access of internet
makes it cheaper for small investors to buy stocks online
However, short-term trading is not going to work, no matter how
small your commission is It is extremely hard to predict
short-term movement of stocks Traders come and go and those
that stay seldom beat the market in the long run Furthermore,
what do you prefer? Spending a few hours each week and making a
14% return on your investment? Or spending 8 hours a day where
the odd of beating the market is slim? I would prefer to spend
just a few hours a week, of course
Buying stocks because the price is ‘low’ Yeah That’s
right It is tempting for a lot of people They figure, if a $ 1
stock can rises a few cents, they will make 20 or even 50 % of
their investments !! Sure, you can But the reverse holds true
as well With a few cents of movement, you can lose 20 or even
50% of your investment !
Investing in sectors you have no clue of Biotechnology
and RFID sounds cool However, unless you are really really
familiar with it, there is no reason to invest in it You may
know how Voice Over IP works, but do you know how does the
company make money? If you don’t, then you should stay away from
it There are hundreds of other companies that are easier to
understand than how gene works
Checking your stock price often You read today’s
newspapers and you go straight to the stock price section You
arrive at the office and the first thing you do is going to
Yahoo! Finance website You went home and the first thing you do
is turn on CNBC and check your stock price Get the idea here?
While you may check your stock quote anytime you want, but your
time may be best served by doing other things Finding the next
best investment opportunity is one such thing
Paying Too Much Attention to Past Result A stock just
drop 20% in a week and you figure, hey it is cheap It has a P/E
(Price over Earning) ratio of 7 ! Isn’t that cheap? Errit
depends If you were talking about forward P/E, then of course
the stock is cheap But if you were talking about trailing P/E
while your analysis shows that this company will never turn a
profit ever again, then the stock is not cheap An example would
be looking at a type-writer company during 1980s
Lack of Diversification Investing in one single stock
can make you rich Imagine if you have put all your money on
Yahoo! in 1997 It can also break you What if you have bought
into Enron stock instead? I believe your most important
investing goal is capital preservation, not capital
appreciation Once you have picked a solid company, capital
appreciation will follow
Over diversification Contrary to lack of
diversification, Over diversification will give your portfolio a
mediocre return Furthermore, having 500 different stocks on
your portfolio will cost a significant amount of commission The
ideal portfolio in my opinion should consist of between 7 to 15
different stocks
Ignoring Insider’s Activity Insiders are generally
people with ownership of a company and who know the inside
working of a company While insider selling may not be negative
signs, a spike in this insider selling may spell trouble
Insider buying on the other hand signals a vote of confidence
for the company
Buying Stocks On Margin While using margin can enhance
your return in a rising market environment, the reverse occurs
when your stock price drops As always, the most important goal
of an investor is capital preservation, not chasing the highest
return
The Desire to Be Fully Invested While having all your
portfolio fully invested is a good thing, sometimes keeping cash
is a better thing I would prefer my money to earn a 0% return
rather than buying a stock that lost 50% in value Therefore, if
you cannot find a good stock to invest, keep the cash
Investing without knowing technical analysis We believe
in investing for the long haul However, it does not mean that
we blindly buy any stocks that look undervalued Supposed a
stock A is undervalued at $15 If technical analysis predicts a
steeper fall, would you still buy it? Of course not We would
rather buy the stock A at a lower price if all else remains
equal
Unrealistic Investing Goals You heard somewhere that
TravelZoo (TZOO) rises 20 fold in 2004 That’s right 2000% in a
year So, you figure, if you can pick 9-10 stocks and one of
them rises 20 fold, then 50% annual return for your portfolio is
a conservative goal Well, not really Think about this Let’s
say you start investing early with $ 1000 investment If you can
maintain 50% annual return for the next 35 years, your $ 1000
will grow to $ 146 Billion Sure, you can have a good winning
streak of 50% return for several years But the odd is, you
won’t achieve that for 35 years in a row

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