Best Ways to Lose Your Money in the Stock Market
1. Having no idea what you’re buying
The idea of buying “what you know.”!!! While this doesn’t mean that you should buy Apple stock because you like the iPhone, it could be a good starting point. Many investors buy stocks in sectors that they don’t understand, simply because financial pundits recommended them. That’s a bad strategy which leads to impulsive purchases and sells since these investors can’t understand the longer-term headwinds or catalysts for a company.
2. Not watching the quarterly reports
Warren Buffett was once asked how investors can make smarter decisions. He reportedly held up stacks of reports and said, “read 500 pages like this every day. That’s how knowledge builds up, like compound interest.”
Most Investors do not keep up with a company’s recent quarterly reports. As a result, they fail to understand why a company missed expectations during the quarter, and become oblivious to upcoming headwinds. That’s why an ideal portfolio consists of less than 20 stocks . If any more it gets hard to follow each company.
3. Ignoring facts, forecasts and valuations
Many short-term traders rely on the “trend is your friend.” This means following trading volume and price fluctuations while ignoring growth and valuations. If you do that, you violate the core tenets of long-term investing — to understand how fast a company is growing, and to determine if a stock is cheap based on that growth. This is really important..!
4. Applying trading strategies to long-term investments
Many investors confuse short-term trading strategies with long-term ones. A classic example is a trailing stop, which automatically sells a stock once it drops by a predefined amount or percentage. Even that sounds like a smart move — the trailing stop rises with the stock, and “catches” it on the way down, removing all emotion from a trade.In reality, setting trailing stops under long-term investments can cause premature selling. If you were a true long-term investor, you would have been buying up more shares instead of selling when the times is right.
5. Selling winners and holding onto losers
Investors naturally want to sell their winners and hold onto their losers. That’s because they’re constantly afraid that their gains will be erased, and always hopeful that they can recover their losses. This is a gamblers thinking.
History shows us how disastrous selling winners can be. If you had invested $10,000 in Amazon in 1997, you would have received 555 shares. After three splits in 1998 and 1999, your share count would have risen to 6,660. That stake would be worth $5.8 million today. Imagine how you would feel if you had sold that stake the first time it doubled, tripled, or even quadrupled.
As for losers, check out BlackBerry (NASDAQ: BBRY), which lost 95% of its market value over the past decade. Investors who believed that the former smartphone market leader would make a comeback (in phones, tablets, or software) were repeatedly burned by lofty promises.
6. Failing to diversify
Lastly, the easiest way to lose money in the stock market is to not diversify. Having a single hot stock account for 100% of your portfolio might be great when that stock goes up, but you’ll be in big trouble when it comes tumbling down.
Likewise, buying a lot of stocks from a single sector doesn’t count as diversification, since bad news about one company often drags down its industry peers. Therefore, don’t allow a single stock to account for over 10% of your portfolio.