When I first dipped my toes into investing, I made many mistakes. These mistakes have cost me much in terms of realised losses and profits forgone. Yet, I am glad that I have made these mistakes when I am young and can afford to. This gives me the opportunity to learn from them and avoid repeating them again. Here are four mistakes I made when I first started investing.
1. Trying to make a quick profit by trading/buying on the news
When I first started “investing”, I would frequently browse the news to find companies to invest in. Whenever a company announced positive news, I would do a quick search on the company. For instance, Pfizer made a series of announcements about their break through in their covid-19 vaccination research last year. Wanting to make a quick profit, I jumped on the train and bought a few shares of Pfizer. However, by the time I had gotten in, Pfizer’s share price had already increased substantially. Later, when the news had died down, I sold the shares for a small loss because I realised that I was trying to trade. This proved to me the futility of trying to buy on the news. This is because by the time news such as this are published, many would have already known about it and bought the stock. Thus, the positive news would have already been priced in. Fast forward to today, Pfizer shares are around 100% higher than what it was last year. This goes to show the importance of knowing what you are buying instead of just buying on the news. I bought an excellent company at an excellent price but still manage to lose money on it, all because I did not do my due diligence.
2. Selling a stock because it’s share price has risen
I made this mistake earlier this year when I sold off my Bank of America and Goldman Sachs shares because the prices had continuously increased into what seemed like overpriced territory at that time. Afraid that the shares prices may dip, I decided to sell my shares to lock in my profits. To my horror, the share prices of these companies continued their upward climb and I ended up missing out on those returns. A quote from Peter Lynch sums this up nicely: “selling your winners and keeping your losers is like cutting the flowers and watering the weeds.” This event also goes to show that just because a company’s share price has seen a huge appreciation does not mean that it has realised its true potential. A truly great company will continue to grow for many years. Since then, I have shifted my mentality to one of adopting a long term outlook. This means buying great companies that will grow for the foreseeable future and leaving my money to compound. Additionally, this served as a reminder that fluctuations in share prices are part and parcel of investing. Thus, I should not sell my investments simply because I am afraid of a pullback in the near term. That is too near-sighted and can be a costly mistake.
3. Trying to time the market (waiting for the price to dip)
Similar to the previous mistake, this mistake has caused me to miss out on significant amount of potential returns. Since the market started its recovery in 2020, many have been warning of a potential market crash. With many indicators pointing towards a significantly overvalued market, I had reservations on investing. As such, I halted dollar cost averaging into the S&P500 index for 3 months. In April, I realised that waiting on the side lines for a market correction was counterproductive as my excess cash was incurring opportunity costs in terms of potential returns forgone. This reminded me of the saying that “time in the market beats timing the market” and proved to me the futility of trying to predict where the market will head in the near term. I have since continued to dollar cost average monthly without fail. So far, this has been paying off. While it is a fact that the market will eventually crash, I will never know whether it will occur tomorrow, next month, next year or even 5 years down the road. Thus, I will continue to stay the course and DCA monthly no matter rain or shine. In the event that the market crashes, I will buy even more.
4. Not having the conviction to buy more
This stems from a combination of not doing enough research and having enough faith. Sometimes, companies that I invest in may trend downwards and end up 10% below my entrance price. At this point, I want to buy more shares to lower my cost basis and because the lower price does not signify risk but opportunity instead. However, I often end up doubting myself. Thoughts that I could be wrong about this company or I could have missed out something fill my mind. I often let my self-doubt get the better of me and end up sitting on the side lines. Only a few months later, the share price has increased to hit all time highs. I am left with excess cash in my hand and full of regret that I did not buy more. Upon reflection, I attribute the self-doubt I experience to not doing sufficient due diligence and planning. Now, I deploy my cash in 2 tranches. The first when I find that the stock price has given me an adequate margin of safety and the second if the stock price ever dips substantially. While this may mean that I may sometimes never deploy all the cash I planned to, it gives me confidence that I will not panic to see my investments dip 10-20% for no valid reason.
You may be wondering why I still make these basic mistakes despite many investors already warning about them. Well, I may know the theory but when it actually happens to me, I start to doubt myself and become hesitant to act. This goes to show that investing is not a science, but a craft, where one has to learn from experience. If that’s the case is there a point in studying the mistakes of other investors? I would argue that studying the mistakes that others make will help us recognise our own mistakes when we do make them. This is the first step in learning from our mistakes and never repeating them again. Lastly, I would like to end this post by saying that mistakes are part and parcel of investing. What matters is that we ensure no mistake is crippling such that we will not have the opportunity to learn from it. This makes the case for diversification. But that’s a discussion for another time!