Bad Investing Habits
In a rush to the riches, many new Investors fall victim to the same handful of rookie mistakes.
So, this article is my attempt to help you lose less sleep (and money) while learning how to invest.
6 Mistakes That Most New Investors Make
Hesitating To Buy
Waiting for the perfect price to buy a stock is a bad idea.
There are plenty of methods to estimate the best price for a stock, but nothing can guarantee that the stock in question will ever dip to your price target.
Instead if waiting for a strict price to enter a new position, consider buying when the price enters a reasonable range.
This way you save yourself the disappointment of watching a stock come within $0.75 of your target right before an exponential jump to record highs.
Buying Stocks in Blocks
If you are afraid of paying too much for a stock or ETF, break up your investment into chunks and choose multiple entry points.
For example, let’s say Starbucks (ticker symbol SBUX) is trading at $115 but I believe its true value is closer to $90.
To add a 3% SBUX position to my $10,000 portfolio, I would need to buy 3 shares of SBUX - Approximately $300 worth.
Instead of waiting for my $90 price target to buy all 3 shares, I can buy 1 share as soon as the price drops to $105, then wait to see if SBUX drops closer to my price target of $90 to buy the rest.
This way, if SBUX never comes down completely to my target I don’t completely miss the boat.
Plus, if the goal is to hold a stock for decades, then a few dollars difference on the entry won’t matter when it’s time to cash out.
Betting on IPOs & Speculative Stocks
Buying new companies that aren’t proven yet is gambling. Point blank period.
Young companies are exceptionally unpredictable investments simply because we don’t know enough about them.
Researching a company is the only way to invest with confidence.
In the case of IPOs and spec stocks, unfortunately, there just isn’t enough data to analyze.
I wrote about this issue at length in a related article “Why New Investors Should Avoid New Companies”
Not Doing Your Own Research
No two people are exactly alike. The same can be said of two investors.
Which explains how a suggestion can be perfect for me yet horrible advice for you and your situation.
Stay In Your Investing Lane
Investing based on someone else’s research is like getting on a bus without knowing its destination.
Without considering where you’ve come from, where you want to go, and how you’re most comfortable getting there No One is qualified to give you sound advice.
Set Clear Investing Guidelines
Before throwing your money at any investment, in the stock market or otherwise, you should take time to set clear, measurable goals.
Establish some guidelines on the investing strategies that you are willing to use.
Create a personalized investment strategy based on factors like;
Your experience level
How actively you want to be involved
Your other sources of income
Your risk tolerance
How long you can stay invested
You’ll be able to judge the suitability of investment ideas better once you know exactly what you want to accomplish.
It’s all good to get ideas from other people, but before you pull the trigger do your own research.
Chasing Big Dividends
Strong businesses that pay a reliable dividend can provide great passive income.
However, if the stocks that you pick ever reduce or cutback their dividend payments your income stream could take a major hit.
Paying Out All The Profit
One warning sign that a company’s dividend is at risk of being cut is a High Dividend Payout Ratio.
The Dividend Payout Ratio measures the amount of profit (earnings per share) that is distributed to shareholders as a dividend.
Whenever this ratio is over 65% we need to start digging deeper to understand why the company is giving away so much of their profit.
Usually, a high payout ratio isn’t the result of a dividend increase.
More often than not, a high dividend payout ratio happens when earnings drop.
Calculating The Dividend Payout Ratio
So, whenever you see a company offering a juicy 8% dividend per share - Pump The Breaks!
Dig a bit deeper and compare the Dividend Rate (the dollar amount of the annual dividend) with the EPS (earnings per share).
This will give you the Dividend Payout Ratio.
If the payout ratio is too high, leave it alone. Or risk having that juicy dividend cut.
Confusing Price For Value
The big mistake of confusing the price of a stock with its value plagues many investors, new and old.
To understand this concept we first have to understand what truly dictates the value of a stock.
The Value Of A Stock
Said plainly - A stock entitles its owner a share of the future earnings of a business.
We invest in businesses so that as they grow, so will our equity in them.
That in mind, it only makes sense that the value of an investment is directly correlated with that business’ ability to;
Make profit
Grow our equity
Invest In Companies With Growing Profits
Given the option of 2 stocks that are trading at the same price, a smart investor would willingly pay more for the company increasing profits and equity faster and more consistently.
This is why some $5 stocks are overpriced while some $500 stocks are relatedly underpriced.
Stocks with reliable growth trends and higher earning potential are more valuable.
Learn this lesson early and save yourself from overpaying for underperformance.
Selling Too Soon
There is a fine line between being wrong and being too early.
As a long-term investor, it is crucial that you don’t get emotionally attached to your stocks. Otherwise, the inevitable ups & downs of the market will have you losing sleep.
So, if you can’t stay in, don’t get in in the first place.
It’s important that you give your investments a fair chance to do their thing. They need time to grow into their potential.
Document Your Investing Decisions
Whenever you invest in a new company write down the logic behind your decision to buy.
Documenting your thought process can help you stay the course when the markets are turbulent. Whenever you feel nervous or find yourself losing sleep over your stocks, revisit what you wrote down.
As long as your original thought process is still sound - Stay the course.
Plan Your Exit Before Your Plan Your Entry
We don’t want to buy companies that we wouldn’t hold for 10 or 20 years in the first place.
So, in order to avoid the stress of holding questionable investments always follow these 5 guidelines;
Never Invest Money You Need Soon: The short-term movements of the market are unpredictable, so never try to predict them.
Avoid Concentration: Don’t invest too much into any one company. Don’t let any one stock make up over 10% of your portfolio.
Do Your Research: Never invest in a company that you are not completely sold on.
Have An Emergency Fund: When you have cash to fall back on it makes it easier to stomach market volatility.
Write Down Your Investment Thesis: Have a specific set of reasons why you believe a stock belongs in your portfolio. Know what you own and why you own it.
Hope this helps!
Thanks for reading.
✌🏾