In the new hit series, Stranger Things, there is a scene where one of the main characters is getting picked on by a bully at school. He later calls the bully a “mouth-breather” and explains that it is just someone who doesn’t really have a brain; a knucklehead. Many investors are mouth breathers because they fall under the common pitfalls of trading. In this article, I am going to address some of these pitfalls to help you avoid them in the future.
- Buy and Hold (Hope)
I wanted to talk about what 99% of typical investors do when they first enter the market. A strategy I like to refer to as Buy and Hope. These investors typically buy a stock that they personally like, maybe because of the brand or what they think it will do in the future, and then they hold it for years hoping that its value will go up. People blindly buy stocks without doing any research on them and pray that they magically climb hundreds of dollars. They are also emotionally tied to these stocks because they picked them out of personal interest. This causes them to go through a good deal of stress when they see the value of their stock fluctuating up and down and it can cause them to make irrational decisions. Such decisions involve holding onto the stock too long even though it is losing considerable value.
This would be like if you loved Michael Kors products and bought them all the time. You have no idea how the company has been performing financially over the years but you decide to invest 1k in their stock anyway, hoping it will go up. If this is your mindset you might as well take your money and head to Vegas because at that point you are just gambling. At least you will have a swanky purse while you lose all your money.
- Timing the Market
Many people believe that they can time the market. When I say this I mean they think can call the lows and highs of stocks to get in at a good price. THIS IS IMPOSSIBLE. In my time as a broker I talked with many clients who would tell me that they are waiting for the market to come down off its high before they were ready to invest. Often times I would look at their account and realize they had been sitting in cash since 2008! That’s 8 years of bull markets (continued upward trend in prices) that they missed out on.
- Hot Stock Tips
Other people blindly follow the heard or a “hot new stock tip”. What typically happens is a stock or the market as a whole will have a big upswing. Prices are rising fast, lots of people are making money, and the media is buzzing about it. The media likes to prey on investors emotions. The typical investor will see this and say “I am missing out!” and then proceed to buy at the peak of this upswing. Then everything starts coming back down (remember the stock market is cyclical just like the economy) and that same investor panics because he has lost so much money and sells out, taking a huge loss. This happens over and over again till that investor is wiped out of cash.
“Be fearful when others are greedy, and be greedy when others are fearful” -Warren Buffet
These are 3 common mistakes people make when they first get into trading. Don’t be that investor! Don’t be a mouth breather! Most of these mistakes come from laziness in doing your own research as well as being too emotional. Check out my article Finding Value in Stocks to learn more about avoiding these pitfalls.
Homework: IPOs represent a great example of emotions playing into the market. Take a look at the stock charts of Snapchat and Blue Apron to see how emotions could have led to huge losses if you had invested in these stocks.