Are you thinking of investing? Well, you’ll need to be aware of the many pitfalls ahead. Here is how you can best avoid them.
Emotional decision-making
Sometimes share prices rise and sometimes they fall. One of the main pitfalls that investors encounter are share price panics and crashes.
Volatility is a fact of life in stock markets. It’s all too easy to follow a stock price intently, and then panic sell as it takes a dip. This is emotional decision-making, and it’s the most common reason why people fail at investing.
Seasoned investors learn to recognise and control these emotions and keep their eyes focused on the road ahead of them. After all, most of the time these fluctuations are just short-term noise.
Over-confidence
Another common pitfall is over-confidence. If you’ve had one or two investing successes, you’ll be hungry for more. But be careful, because you now think everything you buy-into will rocket, and you take less time to do your research and take the plunge far more easily. Not surprisingly, after a run of success, the over-confident investor encounters a run of failure. Suddenly you’ve lost all the money you’ve made.
Instead, take your time, be as choosy as you’ve ever been, and don’t rush into purchases.
Following the crowd
“Be greedy when others are fearful, and fearful when others are greedy.” It’s Warren Buffett’s most famous saying and it can make all the difference to your investing returns.
Clever investors seek out shares that are unloved and oversold, but that still have all the characteristics of great companies. They avoid shares that have been bid higher and higher and whose positive qualities have obviously been over-hyped.
Going against the crowd, or contrarian investing, is more an art than a science, and is more difficult than it seems. You’ll miss the comfort of knowing many others are buying the same thing you are, but the knowledge that you’ve grabbed a bargain few others have spotted will make you smile.
Not seeing the big picture
This is crucial. You have to take a step back and see the picture. Failure to do so will mean you could miss out again and again. Think of the cycle of bear and bull markets. Think of the commodities supercycle. Think of the rise of emerging markets such as China and India. And think of the growing global consumer boom and the tech and biotech revolutions.
Impatience
Finally, be patient. It’s easy to say, but the timeframe for your investments should be in years and decades, not a few weeks and months. The share price of your latest pick may disappoint you initially, but just wait. Overtrading is dangerous and will reduce your returns.
If the long-term trends, and the multi-year view for the company are favourable, then you should stick to your guns. The inherent qualities of the firm will eventually shine through.
Because the best investors learn from their mistakes, and they just keep going.