Business & Finance Finance

Mistakes by Investors

1 Hold on to losing stocks and hope they come back.

Hope is eternal, but your portfolio is not. Holding on to a losing stock is the best way to let your losses run. Combine this mistake with selling a stock that has gone up and you can create a portfolio of dogs. When buying stocks, there will always be some losers: Count on it. However, how you manage that loss often determines the success or failure of the overall portfolio. Keep losses small so that you have the capital to play again. Hanging on to losing positions, hoping that they will come back, can be deadly. A $50 stock that is stopped out at $40 is a 20 percent loss. Its a bad trade, but it is manageable. In order to recoup that loss you would have to make 25 percent on a $40 stock. What if you held on to that $50 stock, hoping that strong earnings would come in and turn it around, but instead it continued lower to $25? Finally, you decide to exit, but now it takes a 100 percent return from a $25 stock just to get back to even. Those results are hard to find, and if you are able to find one, you dont want to waste it on getting back to even. Learn to recognize your losing positions for what they are. If a stock cannot trade above its support line or is not outperforming the averages, find one that is and swap it.

2 Pursue perfection.

There are two types of mistakes to discuss here.

The first is the constant belief that there is a better system out there, and you need to find it. Using a new system to invest each week will not get you to your goal. You will become good at nothing and moderate to bad at everything. To be good requires that you stay focused, disciplined, and skilled at whatever methodology you choose. You need to have the strength of conviction in your chosen discipline to learn from mistakes rather than to run away from them and find another methodology. There is no Holy Grail in investing. The second mistake is to wait for the perfect trade. There is no such thing. If you only buy stocks that have all positive attributes you will maintain a portfolio of cash. Rarely, if ever, do you find a stock that has all the pluses on its side. Look for the big ones like relative strength, trend, and signal. Also remember that 80 percent of the cause of price movement in a stock is based on the market and sector. You are better off being approximately right than precisely wrong.
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