Tuesday, 6 November 2007

Nineteen Common Mistakes Most Investors Make

This is a continuation of my yesterday post on the CAN SLIM acronym by William J. O’Neil book, "How to Make Money in Stocks A Winning System in Good Times or Bad - Third Edition". One of the chapters in the book mentioned about the nineteen common mistakes most investors make. I have consolidated and posted them here.

Even the most experienced investors often make the same classic mistakes that limit their profits or cause steep losses. Here are the 19 mistakes you must avoid:
  1. Stubbornly holding on to losses when they are very small and reasonable. Instead of getting out cheaply, many investors hold on until the loss gets so large it costs them dearly. Without exception, cut every loss at 7 to 8 percent.
  2. Buying on the way down in price, thereby ensuring miserable results. A declining stock seems to be a real bargain. But remember: With few exceptions a stock’s price is high or low for good reasons.
  3. Averaging down in price rather than up when buying. If you buy a stock at $40 and then buy more at $30, and average your cost at $35, you are following your losers and putting good money after bad.
  4. Buying large amounts of low-priced stocks rather than smaller amounts of higher priced stocks. When you invest, buy the best merchandise available, not the cheapest. Low-priced stocks cost more in commissions and are more volatile, usually to the downside.
  5. Wanting to make a quick and easy buck. Wanting too much, too fast, without the proper preparation, can lead to big losses.
  6. Buying on tips, rumors, split announcements, and other news events, stories, advisory service recommendations, or opinions you hear from supposed market experts on TV. Trust what you have learned through hard work, not rumors and tips, which usually aren’t true.
  7. Selecting second-rate stocks because of dividends or low price earnings ratios. Dividends and P/E ratios aren’t as important as earnings per share growth. In many cases, the more a company pays in dividends, the weaker it may be.
  8. Never getting out of the starting gate properly due to poor selection criteria. Many people buy highly speculative, risky stocks that have questionable earnings and sales growth; inevitably, they get what they deserve.
  9. Buying old names you are familiar with. Many of the best investments will be newer companies that, with a little research, you could discover and profit from before they become household names.
  10. Not being able to recognize and follow good information and advice. Friends and relatives can give bad advice. So can some stockbrokers and advisory services, because every profession includes a small minority who are top performers, many who are mediocre, and some who are truly awful.
  11. Being afraid to buy stocks that are going into new high ground in price. A stock that reaches a new high may be on its way to much greater highs.
  12. Cashing in small easy to-take profits, while holding the losers. You should do the opposite: Cut your losses short, and let your profits grow.
  13. Worrying too much about taxes and commissions. The money to be made by selecting the right stocks is enormous in comparison to the cost of taxes and commissions.
  14. Focusing on what to buy, and not understanding when the stock must be sold. Timing your exit is as important as planning your entrance.
  15. Failing to understand the importance of buying quality companies with good institutional sponsorship.
  16. Speculating too heavily in options and futures because they’re thought to be a way to get rich quick.
  17. Rarely transacting "at the market" and preferring to put price limits on buy and sell orders. By quibbling on an eighth of a point, they miss the stock's larger and more important movement.
  18. Not being able to make up your mind when a decision needs to be made. This invariably points to lack of a plan.
  19. Not looking at stocks objectively. Relying on your emotions or only on your opinion is a recipe for failure.

I'll share more information of the book again. Cheers.

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