Investor Mistakes

The purpose of this article is to highlight to the reader potential mistakes that an investor may make. Avoiding these will help to ensure higher returns

Investor Mistakes

I recently wrote an article spelling out the attributes that make a good investor and so I felt that it was time to outline what it is that poor investors are doing wrong. The idea is that if we can avoid these fatal errors we should be able to generate higher returns from investments in the stock market. This article assumes that you invest using the Buffett-Grahamite investing technique of value investing. If you are already using value investing then making sure that you are not performing any of these investor mistakes should increase your annual returns.

1. Not starting early enough:  To truly gain the benefits of the growth of a company you need to be investing for the long term over several decades. Naturally then the best time to start investing in the stock market is as soon as possible. Even better is helping your children understand aspects of the stock market now and helping them make investments for the long term from an early age as possible.
2. Quick buy and sell: The quickest way to eat away at your profits is to buy and sell shares every week or two. Commissions and taxes will very quickly eat away any profits (if you've made any in this short time period). Once again I remind you to have a much longer time scale. Try not to check your shares every day. You are not a day trader. Without working in an investment bank you are not going to beat the day traders. The only way you will beat them is in the long term, over 5 to 10 years.
3. High Commissions: Ideally you want to find a cheap broker who doesn't take to much profit away in commissions. I use a cheap on-line trading platform that charges me £5.75 per trade, regardless of size.
4. Invest with debt: This is a terrible idea. Investing is a risky business as it is without funding it with debt. Don't do it! Simple.
5. Over or under diversify: Having too many shares spreads your risk but gives you little room to make large profits. Having too few shares leaves your portfolio open to large swings if one or two shares have a bad spell. Buffett recommends that the casual investor should be looking to manage 8 to 12 shares. This is an amount that is manageable and gives you some form of diversification.
6. Listening to people or emotions: This is the worst mistake that most investors make is to listen to the 'wisdom' of others in a bar or pub. Any tips should be treated as if a five year old told you. Ideally you don't want to follow trends but if you want to check the numbers on a particular share that you keep hearing about feel free to do so using value investing. Furthermore if you've calculated the numbers and everything checks out but the market appears to move against you don't allow your panicked emotions to dictate a trade (to sell for e.g.). If your numbers were correct, have faith and be patient and the market will eventually follow.

Are there any other big investing mistakes that people tend to make? Do you agree with the 6 points made above?

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