Ask any investor out there about his investment journey and chances are, he would have bought the wrong stocks or made a mistake when doing so.
Maybe he invested in a company without knowing the full details or upon hearing some stock tips. Or allured by top volume penny stocks which go nowhere. Or simply take profits too soon and hold on to losers like forever because you cannot bear to ‘realize’ the losses.
While it is natural to feel embarrassed about making these mistakes, I think there’s no reason to dwell on those emotions, especially when it comes to stocks. Here’s why:
You Are Not Alone
Fundamentally, although the stock market is poised to always go up in the long run, it is bound to go through economic cycles – economic booms and busts. This means that investors who want to experience the upside would definitely have to endure the downside as well.
However, many people may not feel it on the ground because we are constantly bombarded by enticing news or chatter such as how well a respected financial blogger is performing or a particular fund manager is trouncing the markets.
Luckily, here’s good news!
The truth is that everyone loses money from time to time – because that’s just how the market works!
According to a fun experiment done by this blogger, he made a fake “portfolio” in a stock market simulation where he purchased stocks based on typical “stock picking” behaviour.
This means buying stocks from “winners” which are outlined in CNN Money, or other financial news outlets, picking up suggestions from co-workers, or even straight up guessing.
The results? Horrendous.
Out of the 10 stocks he picked up from those methods, he only managed to get one increase in value while the average portfolio consistently sank lower in value. He demonstrated one important point here: It is commonplace to buy the wrong stocks and people do this all the time.
that, the takeaway is to stop relishing in other people’s success or another
friend’s public display of his
affection top winners. Instead, focus on
improving your own portfolio and know that it is not about timing the market,
it’s more about time in the market.
Develop your Mind
While the stock market has a lot to do with money (of course!), there is also a psychological element to it. If you have noticed, investors often have to ask many questions including:
- Is my losing stock having any issues I am not aware of?
- I can get high dividend yields from this stock but am I losing out on the capital gains?
- My portfolio is in the red; will it go down further and should I cut loss?
To be honest, that’s what makes investing so tough because there is never a right or wrong answer and there is a constant psychological barrier you have to overcome.
Take for example Tesla – there are 2 camps, one is lamenting on the tepid cashflow it is burning to simply stay afloat while the other camp would be singing its praises on how Tesla is revolutionizing the EV industry as the market leader.
To make things worse, there are always events that can sway our emotions. Things like seeing an article for a company you invested in getting caught up in a major scandal – a good example is Best World. Or perhaps there is a company that is showing a lot of promise in the future but its financials don’t look so stable at the moment e.g Creative Technology.
You tend to make mistakes when you have emotions coming into play. But the point I want to drive across is this, its honestly okay to make mistakes because it teaches us how to better prepare for it for next time.
More importantly, it helps you to train this mental resilience as a differentiator between those who can make it big in the investment world and those who don’t.
Come Up With New Habits
Last but not least, you should not be embarrassed about bad stock investing decisions because the experience can teach you more than just developing your money mindset. It also teaches you what other habits you can learn and develop as well.
Over the past decade where I have been constantly doing investments, I feel that I have set up a few investing rules which turn out to be helpful in my daily life too. Here’s some of them:
- Choosing my battles – I fight where I think I have the highest chances of winning. I found out that my forte is in analyzing stocks so I will not venture into things like Forex, Bonds, Mutual Funds etc.
- Do your own homework – there are always hearsay or rumours or ‘noises’ out there trying to influence your decision. Tune them out and listen to what your due diligence says.
- Being thrifty – I always think about how much I will be forgoing in terms of compound interest when I spend on something. This probably has to do with a story I heard from Warren Buffett before…
Warren Buffett, the best investor of the 20th century, was riding an elevator up to his office and saw a penny on the floor. He was not alone as there were several executives in the lift as well, but none took notice of the shiny penny.
When the doors of the elevator opened, Buffett leaned over and picked up the penny to the shock of the executives. As he left, without turning around he held the penny up over his shoulder and said, “The beginning of the next billion.”
In a nutshell, habits stem from experiences and experiences come from going out there to act on it and learn from the mistakes. So there is no need to be ashamed of buying the wrong stocks or getting in at the wrong prices as long as you pick up valuable lessons/habits from there.
To wrap up, buying the wrong stocks is a mistake that many investors will make and its like the part and parcel of an investment journey.
But what matters most is your reaction to it.
Are you going to avoid investing completely and not achieving financial freedom just because you made a few mistakes (I have heard of many doing that)?
Or are you going to overcome the obstacles and prove that they are by far the most humbling and important lessons to make you a smarter investor?
I am sure I will pick the latter.
PS; If your goal at the end of the day is to learn how to pick stocks with numbers versus opinions, to have a solid understanding of how to calculate the true value of a company and know when its undervalued, and to actually know when you should and should not be buying a stock/business based on pure fundamentals versus “hot rumours”, I cannot recommend enough that you do two simple things.
First, read all the books in this list:
- The Intelligent Investor by Benjamin Graham (recommended by Warren Buffett, especially chapters 8 and 20.)
- Common Stocks and Uncommon Profits by Phillip Fisher (recommended by Warren Buffett himself)
- One Up On Wall Street by Peter Lynch
- Big Debt Crisis by Ray Dalio
- What Works on Wall Street by James O’Shaughnessy
- Fooled by Randomness.
- Poor Charlie’s Almanack by Charlie Munger
- The Snowball: Warren Buffett and the Business of Life (Biography between Buffet and a reporter)
Second, if you can’t stand the long wait and you wish to shorten the learning curve, you can come in for a live demonstration of how we perform the business’s intrinsic value calculations in person. We demonstrate how we do it live, with basic maths, common sense, and well…more common sense. Definitely not for those who believe in hocus pocus magic wishes.
If you are the same, and you’re numbers based, and you’d like to cut through the noise the market has, feel free to join us.
If not, have fun! And I hope you had a good read.
Behavioural Psychology fanatic. I like good food, movies, intelligent conversations and logical reasoning. I also dabble with options, factor-based investing, and data analytics.