Hey there! I’ve found lately in the blogging community there’s this idea that we are “perfect” and don’t make mistakes on the subject that we write and teach about, and honestly, that’s no the case! Therefore I have decide to write this post were I’m going to explain some of the worst mistakes I’ve done while investing and how to prevent them. And yes, I have lost quite some money due to this mistakes, and because I’ve learnt from them, I no longer repeat the mistakes.
I hope you find this post useful and hopefuly you can learn from some of my mistakes so you prevent yourself from making said mistakes.
Mistake #1 – Buy Stocks only because the share price is “cheap”
When I began investing I had only $1,000 in my account and my idea was to buy as many shares as possible with that money. By this logic I immediately discarded stocks over $10 per share and focused my attention only on stocks between $0.50 and $5 per share. My reasoning was that a) The more shares I buy, the more money I make and b) it’s easier for a stock to go from $0.50 to $1 than from $10 to $20. I was SO wrong….
You don’t need to buy more shares to make more money, if you buy 100 shares at $1, or 1 share at $100, and both stocks go up by 10%, you are still making $10! Not only that, when we buy stocks we get charged a flat fee per transaction plus an ECN Fee per share, in my case (Questrade) I pay $4.95 fee plus $0.01 per share. If I buy 1 share I pay $4.96, but if I buy 100 shares I pay $5.95. Technically, the more shares I buy, the more I pay in fees, and if we have a small account, fees can take a huge chunk of money.
Second, share price doesn’t matter! What matters is the Stock Market Capitalization (Company Valuation). We have to understand that share price is Market Capitalization divided by Shares Available. If Stock A has a market cap of $100 and only has 10 shares, then share price equals $10. Stock B has a Market Cap of $1,000,000 and also 1,000,000 shares, share price is $1. Realistically, Stock A has a higher chance to double its share price since is a lot easier to go from a market cap of $100 to $200 than going from $1,000,000 to $2,000,000. So please, don’t only focus on Share Price, because Market Cap also matters a lot.
How did I lose money? Well, I stopped myself from buying some of the leading stocks like Shopify (SHOP), Amazon (AMZN), Canopy Growth Company (CGC) and instead bought laggards and really bad stocks on the same niche just because the share price was cheaper. By not buying the leaders I left so much money on the table, and also, by buying the laggards (“cheap stocks”) I also lost money because the stocks couldn’t stop falling.
Mistake #2 – Buying Stocks without doing my own research
This is by far the most expensive mistake that I’ve done, and I’ve been guilty so many times… It goes like this: I’m having a casual conversation with a friend and he tells me “Hey, I bought Stock A and it’s making me a lot of money, you should buy it too” and my brain does the following “Hey! This person is really a really good investor, so if he recommends the stock then it means that he did the proper research and the stock is great”. I proceed to add money to my investing account and buy Stock A.
Couple weeks later Stock A begins tanking hard and I see it drop 5%, 10%, 20%, 30% and I begin panicking, I start reading charts and looking for support and resistance points and once the support has been lost I proceed to sell the stock and call it a day…
Guess what? 2 months later the stock has doubled in price and me, “super smart investor” ended up losing money on that stock… How on Earth did that happen? Is it because the Universe don’t want me to make money? Am I doomed to be poor? It’s just my luck to lose money?
NO!!! It’s because I didn’t research the stock! EVER!
“Stocks aren’t lottery tickets. There’s a company attached to every share.” – Peter Lynch
And what I mean by researching is: What does the company do? What is my and my friends opinion on the company? What is the company planning to do in the future? (I group these questions on “Fundamentals”). Is the company making money? Is it constantly going into debt? Is it just a temporary setback? (These questions are “Financials”). And last but not least, what is the current trend of the stock? (Trend) as in, is this downturn temporary and normal for the stock? What is the stock direction in the past 5 years, up, down or sideways?
If I did the research, understand the fundamentals, financials and trend are great, then instead of selling my stock at a 30% lost, I would instead buy more because I know that at the current price the stock is a steal! Even better, buy buying more shares at a discount, I can lower the average price I paid per share, making more money in the long-run!
And this is how you make money in stocks!
Mistake #3 – Fear of Missing Out – FOMO
Have you ever started to read about a stock, or someone told you about a stock, and suddenly before you finish (or even start) doing your research the stock starts going up? Like really going up, as in 5% to 10% every day and you find yourself angry and disappointed because you didn’t buy the stock? And just when you are so afraid that you are going to miss the fun train, you decide to buy the stock and it suddenly drops leaving you with losing investment?
Must likely it has happened to you and it has happened to me many, many times. Remember mistake #2? Never buy a stock without doing your research. We cannot assume that the stock is great just because it’s currently going up, you cannot do the research backwards, a stock can have a great trend, but the financials and fundamentals can be garbage, in that case, its just a matter of time before the bubble pops. And guess what? Usually before popping, the stock goes up really fast and then suddenly crashes very fast. This is because investors and traders are selling the stock to lock the gains, causing the stock to drop fast.
How do you overcome this problem? Easy, don’t buy stocks on a breakout! This means, even if you did your research and the stock is great, either buy the stock when it dips, or buy when the movement is really slow. I try to avoid buying stocks a couple days after they had a massive surge and this is because you can always expect that investors and traders will sell some shares to lock the gains and will inevitably cause the stock to go down.
When I let my emotions decide my investment strategy is when I make mistakes. During the cryptocurrency frenzy I bought a stock called HIVE just because it was going up real quick (I’m also human okay?! lol), I didn’t do my research. Eventually HIVE started crashing real fast, I sold it with a marginal gain and immediately decided to buy BlackBerry because the stock suddenly went from $13 to $18 and I was watching it for months. Guess what? I bought BlackBerry just at the top and now I’ve been holding a stock with a 25% loss…. Why did I do it?… The answer is: Fear of Missing Out.
We are only humans, don’t be so hard on yourself
We are all bound to make mistakes with our investments, sooner or later it will happen. We have to acknowledge that fact as soon as possible, but instead of having a pessimistic view of the situation, we have to actively learn from our mistakes in order to not repeat them again. Remember, the Stock Market is a place where we pay mistakes with money!
Also, I’m constantly reminding myself the following quote from Peter Lynch:
“In this business, if you’re good, you’re right six times out of ten. You’re never going to be right nine times out of ten.” – Peter Lynch
I live by that quote, and if you check my portfolio you will find some stocks that are causing me to lose money and that is normal. No one can expect to have a portfolio of 100% winning stocks. The important thing is to always research stocks before buying, sticking to your strategy and to be humble enough to sell a stock when we made a mistake on our research and turned out to be a bad investment.