5 Mistakes Beginner Investors Make

#1: The share price has been going up, it’s definitely a good stock to buy.

 

This statement is probably the worst out of all rookie errors to be made. Movements in the share price do not tell you anything. (Unless of course you are using other technical indicators, but let’s not go into that) Just because the share price is going up doesn’t mean that it is going to keep on going up forever. One great example was a stock I was looking at was when I was 16, I had my first love…  Just joking.
IEP share price

I was looking at Icahn Enterprises because I was reading a lot about different investing titans and he was one of the people I was reading about. He had a great track record and he was an amazing activist investor. As quite a beginner back then I was quite fixated on the share price and I thought this is actually really good it’s definitely going to keep going up. Guess what? I was so wrong and share price actually collapsed in the next couple of days. On the 6 Dec 2013 it was at $138 and 21 days later it was at $107. (Now it is 53 so thank God I did not buy it) It was then that I realised that following the stock price movement really doesn’t matter. The fundamentals of the company are what really matter.

 

#2: Everyone uses Stock A, so you should buy it!

 

This is a little bit of a grey area. But the point I want to make is: don’t just buy something because it’s popular. For example, so many people used Snapchat and it was really popular. 

 

Snap Chat Share Price

 

The company’s IPO was at a crazily high valuation and lots of millennials actually bought Snapchat thinking that because everyone around them was using it so it must be a good investment. They were dead wrong and Snapchat has been doing terribly since it went public. So make sure that if the company is really popular that they actually deserve the price that they are selling at. Why would anyone want to buy Snapchat when they can’t generate cash flow at all.

 

#3: The stock you just bought fell, sell it!

 

giphy

 

Again, this is similar to the first point. Just because the stock fell a few percentage points does not necessarily mean that you have made a bad investment. These price movements may just be noise and not actually reflect the fact that the company isn’t doing well. But you can read more about what to do when your shares are going down right here: https://capitalistlad.wordpress.com/2017/09/22/facing-your-losses/

#4: The market confirm won’t go down anymore!

 

giphy1

 

Do not time the market or try to time the market. There is no way (unless you are really damn lucky) that you will be able to hit the absolute bottom or top of the stock market cycle. There are 2 ways to prevent timing the market. One way is to Dollar Cost Average where you consistently dedicate some cash to invest every month or whatever time period you decide. Read more about it here: https://www.investopedia.com/articles/01/090501.asp

The other way is by looking at the value of the market to see if the stock market is cheap or expensive based on valuation metrics and then make your decision based on that. For example, when looking at American stocks, a really useful indicator is the CAPE ratio which is short for Cyclically Adjusted Price to Earnings Ratio. It was created by the Nobel Prize winner Robert Shiller and it is basically the P/E ratio for the S&P 500 using an average of the earnings of the past 10 years. As you can see, the only time when stocks were selling for more expensive than they are now is in 2000 which was the Dot Com Bubble.

 

CAPE Chart

Of course, there are also other ways but you can research more about it yourself.

 

#5: The dividends are higher for Stock A so it is better than Stock B.

 

giphy2

 

While the dividend yield is higher, this may not necessarily be true. There is much more than dividends to a company. 2 things you want to look out for are 1) The dividend payout ratio which is Dividends/ Net Income. If the ratio is higher than 1, it means that the company is using most of its income as dividends and not reinvesting its profits to grow the company. So sometimes companies with lower dividends or none at all can be better because they are using their profits to grow. 2) Other fundamentals such as future prospects of the companies and industries that they are operating in. So a company with high dividends operating in a dead sector may be worse than one in a growing industry with lower dividends.

Hope you enjoyed today’s article! If you like it and want to know more please go to our Facebook page and click like!

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s