Many of the emails and phone calls I field these days involve some sort of avoidable error on the part of the subscriber that’s cost him money. So this week I’m writing about the 10 biggest mistakes investors make … and, of course, how to avoid making them.
I’ve organized the list according to experience level—the potholes that beginners, experienced investors and professionals hit most often.
Beginners
Biggest Investing Mistakes #1: Failure to keep risk in check: Most beginners only think of upside, as opposed to potential loss of money. That often leads to too-large positions and a refusal to get out of losing stocks.
Solution: Set a maximum position size (say, 10% of your account) and a maximum loss limit (say, 15% from your purchase price). Like having home or health insurance, these rules are meant to prevent the occasional devastating mistake.
Biggest Investing Mistakes #2: Buying lagging stocks: Newer investors often have little discipline when it comes to stock selection. They end up buying stocks that have nice stories but not much else.
Solution: Have at least two or three hard-and-fast criteria for stock selection, such as staying with stocks priced north of 10 and companies that have growing sales and earnings. That alone will keep you out of many junk stocks.
Biggest Investing Mistakes #3: No faith in the system: Confidence is very important to investors. You can give a new investor a proven plan that puts the odds in his favor over time … but after three losing trades in a row, he’ll give up and search for the next Holy Grail.
Solution: Two ideas. Make sure you’re starting out with a system you think fits your personality (i.e., don’t go with day-trading if you have a long-term value mindset) and start investing with relatively small position sizes so that losses don’t stress you out.
Experienced Investors
Biggest Investing Mistakes #4: Cutting profits short: Experienced investors often “lose” because they are too eager to book profits—often because of a prior losing streak or fear of the unknown. Remember, the real secret to market success is to win big and lose small.
Solution: Try splitting the difference by taking partial profits on the way up, and then forcing yourself to stick with your remaining shares with a trailing stop, aiming for a bigger winner.
Biggest Investing Mistakes #5: Too close to the market: We’ve all been guilty of watching every wiggle our stock takes, which often results in emotional buying or selling decisions we eventually regret.
Solution: Form a game plan (at what price you’ll buy or sell) when the market is closed, when you can think calmly and clearly. I know I do my best research over the weekend!
Biggest Investing Mistakes #6: Delving into the arcane: I’m all for whatever works, but most of the time, looking at arcane chart indicators, seasonal patterns and wave counts only serves to confuse the issue.
Solution: Keep it simple! Personally, I focus on a few key factors: technically, I look at price, volume, a couple of moving averages and relative performance, and fundamentally, I focus on sales and earnings growth, and the potential of the story.
Biggest Investing Mistakes #7: Too much emphasis on news/analyst opinions: News can be important ... but too many people focus on the news instead of the stock’s reaction to that news.
Solution: Watch the chart. Many times, especially in strong market trends, “important” news items or upgrades/downgrades barely cause the stock to move.
Professionals
Biggest Investing Mistakes #8: Ego check: Most professionals are smart and competitive, but they often let their ego (picking tops and bottoms, betting against trends) get in the way, which can lead to huge losses. (The failure of the Pfizer-Allergan merger and the plunge in VRX are good examples.)
Solution: Not everyone has to be a trend follower, but every system should have some sort of failsafe to cut back if the market proves you wrong. Again, not losing big is the big secret to making money.
Biggest Investing Mistakes #9: Performance anxiety: Professionals often make poor decisions when they’re underperforming, making oversized bets or latching onto lottery ticket stocks, hoping for a big win.
Solution: The issue here is “stacking,” when past mistakes lead to future mistakes. When I’m in a rut, I tend to (a) cut down on my position size a bit to relieve some pressure, and (b) focus solely on the future, just trying to outperform the market during the next few weeks.
Biggest Investing Mistakes #10: Liquidity Issues: Professionals must be wary of liquidity—I’ve seen many get caught in a thinly traded stock when things go bad because they can’t get out!
Solution: Stick with liquid stocks, which I define as at least $50 million per day in trading volume. In fact, I’ve found that focusing on liquid leading stocks not only lessens blowups, but adds to upside performance.
I’m still bullish on the stock market, though I think the recent weakness could continue for a little longer. Thus, despite the potholes, I expect higher prices in the weeks ahead.
One idea that just popped back on my radar screen is Monster Beverage (MNST). Here’s some of what I wrote about the stock recently in Cabot Top Ten Trader:
“Monster Beverage is starting to reap the rewards of a 2015 deal with the world’s largest soft drink company. Coca-Cola bought a 16.7% stake in Monster for a cool $2.15 billion in cash two years ago, and thus began to give Monster access to Coca-Cola’s vaunted distribution network. Monster’s sales were already consistently in the high-single-digit and low-double-digit range prior to the Coca-Cola deal, and most investors except that to accelerate slightly going forward. The company announced a $2 billion share repurchase program during its first-quarter earnings call last week and the results were strong too—sales and EPS were well above analyst estimates, as Monster’s expanding international distribution reach offset continued strength in the U.S. dollar. The company is about to spread its wings even further; thanks to its Coca-Cola agreement, Monster Energy drinks will hit shelves in Australia and New Zealand later this month. With analysts expecting earnings to rise 32% this year and another 20% in 2017, the potential here is big.”
After a long 14-month rest period, I think MNST has good potential going forward, though it could use a proper setup. For my up-to-date advice on how to handle MNST and other leading stocks, you should subscribe to my Cabot Top Ten Trader—there’s no risk to you, and as this bull market continues, you’ll be able to land many big winners.
