We have all made mistakes in the stock market – mistakes are a natural part of a learning process.
But that doesn’t mean you should just shrug off your mistakes and make them again.
You should examine them, and you should learn from them.
What are the typical mistakes that private investors make?
The Stock Market Is a School for Life
You never graduate as a stock investor. The stock market is a big playground where you can continue to learn new things and improve as an investor.
However, the typical mistakes that many make can be avoided right from the start – if you inform yourself.
The typical mistakes are:
– Investing without researching
– Selling stocks too early and missing out on a larger gain
– Selling in panic with losses
– The biggest mistake we all fear is investing in something that is declining or going bankrupt.
How do you avoid making mistakes?
Here are five concrete steps you can take:
1. Learn and Read
The best investors are constantly learning and keeping up to date.
Warren Buffett reads more than 5 hours a day. He says that knowledge accumulates, just like money does. The new things you learn are built on top of something else you’ve already learned, and over time, you have an exponential learning curve.
What should you read and learn?
You should make sure to stay updated on major societal and business news.
You should read newspapers like Wall Street Journal and New York times every day, listen to investment podcasts, read blog posts like this one, and read investment books.
If you want to be a good investor who buys shares in individual companies, you should also get used to opening and reading financial statements.
2. Research Your Company and Use a Checklist
If you invest randomly – maybe because someone mentions the company – you will make more investment mistakes than if you familiarize yourself with the company before investing.
You should look at the financial statements and research the product to be sure you understand what is going on in the company.
The best way to ensure that you answer the most important questions about the company and its products and services before investing is to follow a checklist.
Your checklist should ideally change over time as you gain more experience and discover your weaknesses.
You can use my checklist by clicking here.
3. Discuss Your Investments With a Good Partner
Every year, Warren Buffett holds an auction where you can win lunch with him and his partner Charlie Munger.
Guy Spier and Monish Pabrai won the auction in 2008 for $650,000. One of the best pieces of advice they received at that time was exactly this: to have a partner to bounce your ideas off of.
Warren Buffett has long bounced ideas off of Charlie Munger before investing in a company. Guy Spier and Monish Pabrai bounce ideas off of each other.
Do you have a person you discuss investment ideas with? Someone who can show you different sides of a company than the ones you’ve fallen in love with? Someone who can challenge you intellectually?
It doesn’t have to be just one person – it can be several. If you have a group of like-minded individuals to share your ideas with, this is invaluable.
At the Value Investor Academy, we discuss different cases selected by members.
Here, you can present a case and receive critical questions from multiple people at once – perhaps you’ll find your future investment partner there?
4. Argue Both Sides of the Case
Just like in a courtroom, you should hear both sides of the case when analyzing a company. That means you should act as both defense and prosecutor for the same company.
First, you should take a look at the company fairly neutrally to examine whether you would invest in it. If you arrive at a yes, it’s time to bring out the prosecutor.
Now, you should look for all the reasons you can think of why it’s not a good investment. Then you should come up with counterarguments to the negative accusations. If you need inspiration for the counterarguments, you can Google and find those who are shorting the company and see if you have argued for their case.
5. Get Educated About the Stock Market
When we learn to drive a car, we take driving lessons. When we learn to sail, we go to sailing school and tie knots endlessly.
When you’re going to invest in the stock market, it’s also a great idea to get education that equips you to make fewer mistakes and become faster at making money. If you really want to elevate yourself to a new level, it’s a good idea to follow a structured program and perhaps even get a coach.
I run the Value Investor Academy 1-2 times a year, and you’re welcome to join. If you want to secure a spot in the next class this fall, you can send me an email at info@moneyandfreedom.com.
The Biggest Mistake of All
Now we’ve talked about blunders you make when you invest. But there’s a much more serious mistake than those… and that’s not getting started at all.
If you don’t start investing, you’re not only missing out on the opportunities that could have arisen if you had started. You’re also missing out on all the learning.
When you make mistakes as an investor by investing in something you regret, you at least learn something from it.
You learn nothing from not getting started.
Learn something today. You can download your free investing e-book Free Yourself here.
