If you’ve been reading some of my past basic investment mistakes, which I’m detailing in the investing section, you’ll know that I’ve made a ton of silly decisions over the years, but here is my list of things to remember.
My Top 5 Basic Investment Mistakes
After all, investing is a tricky and uncertain affair if you’ve never bought stocks or shares before; so here are five basic investment mistakes you can easily avoid:
1. Buying a Stock on a Friend’s Tip
You’re at work or on a stock board, and you come across a tip that such and such a stock is going to bounce by 10% or 20% or 100%. Perhaps you find an email that recommends you purchase a penny stock! Don’t. Just don’t.
You need to do your own research, read about the company’s products & services, and have a look at the numbers yourself. I can’t stress this enough, because even reputable analysts get it wrong. Few would have predicted the demise of companies like Nokia, Motorola, or RIM ten years ago. Only a RIM remains now.
If you’d taken a punt on RIM, because of the launch of the Storm, you’d be seriously under water now. Nokia has been a rollercoaster since the 00’s, and Motorola is no longer in the handset business.
Do your own research, be objective and decide for yourself. Otherwise you’ll be on the rollercoaster ride!
2. Not Keeping Good Records
It’s not as difficult as it used to be to keep records, many online brokers keep records of trades for years in your account. So you can track down more easily what you paid, when you purchased, and how much stock you actually bought.
However, with online document creation services, like Google Docs, Microsoft’s Office, you can easily create a personal record of each transaction, add dividends, etc. If you can use Excel, then you’re pretty much good to go. Even a pencil & paper will do.
3. Paying Too Much When Buying
The biggest enemy of profit or driver of loss: paying too much when you purchase. Your profits are determined by your entry price more than your exit price, so watch what you pay. Warren Buffett recommends this, too.
If’d bought some of these stocks in 00’s, I’d have paid way over the odds. I’d certainly have to consider buying them now VERY carefully. The trouble with consumer-side investing is that we don’t have the advantages that Buffett has to seal inside deals with generous terms. We don’t.
Let’s give you an example: suppose you buy Microsoft at $20 per share and you sell at $30, your gross profit is approaching 50%. Not bad, eh? But if you had bought it at $25 per share, your profit margin would be only 20%! Of course, if you’d borrowed to buy the stocks, the difference would be even starker.
The only way we can control the profit margin is by watching what we pay at the outset. It doesn’t have to be the lowest price possible, but you should avoid those high price days.
4. Forgetting Dividends Matter
Dividends do matter. A lot. In fact, they can mean the difference between overall profit or loss. In some stocks I’ve purchased, the profits came from the regular & increasing dividends that were paid; while the purchase price remained the same.
In 3M’s case, they made up 2/3rds of my gain in value. That’s something that you need to consider. Ignoring dividends, like I did in 1998, is a costly mistake.
Lots of companies pay dividends, though tech or internet companies may not. In fact, if the companies aren’t making money, dividends are impossible.
5. Not Running a Profit
I’d put a big black cross these days against companies not running a profit. It’s one thing to not run some kind of profit in the first couple of years. Most startups do this. But after year 5, a company should really be profitable, not just showing a plan for creating profits years from year 5.
While gargantuan profits are rare in many industries, do look for real profits not just share price increase. At some point, the share price will come to reflect the actual money that the company makes. If the margin in profits is too slim or too far away, investors can turn cold quicker than a lasagne in a blast freezer and leave you nursing losses that are hard to claw back.
Sky high PE ratios can be an indicator that profits are slim; or the company profits prospects are limited. Such PE ratios can fall back to earth rather quickly. I can think of several companies right now with high stock prices and growth expectations, but very very slim profitability margins (*cough* Amazon, current P/E is not available because it’s losing 88c per share.
Investing for Beginners: Take it One Step at a Time
Any good beginner investor knows that company research is the first step to take if you want to avoid making any of these basic investment mistakes.
You really need to spend time thinking about the company as a business, deciding what to buy & when to buy. Don’t forget to have an exit strategy, too.
Then spend time reviewing a good investment guide. That is the next step. There are some really great investment guides and professional advice waiting for beginners.
Developing your patience and persistence to invest successfully is simply the most useful & successful strategy you will ever have in your arsenal.