Avoid These 25 Investing Mistakes

There is a host of possible investing mistakes. Avoid these 25 investing mistakes to improve your investment returns and enhance your investing experience.

Investing In Stocks Is Like Gambling

This is a common myth among people who know little about stocks. Because they know so little about equity investing they choose to believe it is a random, unpredictable, and dangerous activity.

Investing in equities, however, is quite the opposite if done properly. Sure, if you invest recklessly in highly speculative stocks without conducting any research in the hope of getting rich quickly, this is akin to gambling. The same applies to an investment in a single red-hot 'can’t lose' stock that is front and centre in the media.

Saying investing in stocks is like gambling is like saying 'Driving a car is dangerous'. Naturally, driving toward oncoming traffic in reverse at a high speed is dangerous. Drive safely and follow common traffic rules, however, and driving has an acceptable degree of risk. When you drive properly, driving adds considerable value to life.

Stock investing is the same. Invest improperly and the risks are significant. Invest correctly and you can derive considerable value for an acceptable level of risk.

Day Trading

Stock trading is a win/lose activity.

A successful day trader must join the crowd as the value of an investment is rising and be smarter than the crowd to exit before other investors do if the value starts to fall.

The odds of day trading are like those of any other high-stakes gambler. The professionals are typically well-established, disciplined, expert traders. They also invest large sums of money which they can afford to lose; large sums of money are required to capitalize effectively on small price movements.

Many day traders are unsuccessful because they make emotional decisions. Some day traders give up their job to trade full time and hope to generate sufficient income to replace their salary. This results in so much pressure to make money that emotions enter the decision-making process.

Here are some sobering statistics that should discourage people from becoming day traders.

  • ~40% day-trade for ~1 month.
  • ~80% quit with the first 2 years.
  • ~7% remain after 5 years.
  • ~1% are profitable net of fees.

The Stock Market Is Like The Economy

It most certainly is not.

The idea the market is an indicator of the future and is closely linked to the real economy is mostly a myth. The market can be extremely irrational.

It is irrational to have high stock price valuations before a correction. Before any crash, it is not possible to anticipate an impending correction from the market's behaviour. The late 1990s saw a huge run-up in Internet stocks and a crash in 2000. Similarly, a big run-up in stocks ended in the 2008 - 2009 market crash.

Some analysts and academics insist stocks rationally and accurately reflect the future. This is a naïve and dangerous notion.

One reason stocks do not reflect the economy's health is the rise of stock buybacks. Arguably, companies often push stocks higher to raise the value of the stock options held by management. The 2018 tax cuts and the dramatic increase in the use of low-interest rate debt often resulted in the repurchase of issued and outstanding shares; the reduction in the number of shares outstanding drives up earnings per share. This has no link to the economy.

Another reason the stock market is not like the economy is that one particular sector might be the driving force in the rise in the stock market. The economy might not have fared well in 2020 but the S&P500 index certainly performed well. Much of this had to do with the performance of high-tech companies like Apple, Facebook, Amazon, Google, and Microsoft.

Buy Low PE Stocks

Many investors often hone in on a company's price-to-earnings (PE) ratio when searching for undervalued companies. This measure reflects the price people are willing to spend on a business for each dollar of earnings it generates.

If investors anticipate strong future growth, they will pay more. If it appears earnings will not expand or expand slowly, investors will pay less.

The PE metric is a good starting point. It is not, however, wise to make investment decisions only on this metric. PE ratios may fall in the short term, for example, because of a one-off event.

Besides, a company's stock price can have no bearing whatsoever on the underlying fundamentals of a business.

Investors should look at trailing, current and forward PE ratios.

  • trailing PE uses past earnings;
  • current PE takes into account this year’s earnings;
  • forward PE uses what analysts think the company will earn in the future.

I rely most heavily on the forward PE measure which is typically based on adjusted earnings.

Adjusted earnings is used when a company incurs a large expense or experiences significant one-time gains that would not otherwise be part of regular operations. The idea is that the company can generate a more accurate picture of its financial health by using an adjusted earnings figure to offset these expenses or gains.

The biggest disadvantage of using adjusted earnings is that this is not a Generally Accepted Accounting Principal measure; it can be easily manipulated to exclude costs that should not be excluded. It is, therefore, very important to delve into the numbers and to determine the extent to which historical adjusted earnings have deviated from GAAP earnings.

Although a low PE ratio can be used as a metric upon which to identify undervalued stocks, it is extremely important not to rely exclusively on this metric.

A knowledgeable investor should be able to look at a company's financial statements and determine what is an appropriate stock price range without looking at a company's stock price.

A Stock Is Undervalued If The Share Price Is Low

Many investors look at the historical 52-week stock price range as part of the investment decision-making process.

It can certainly be used as a metric in a stock screener to identify companies worthy of further review. It should not, however, be the basis upon which an investment decision is made. A company's stock price has no bearing on a company's valuation and is a fundamentally flawed investment-decision making metric.

Suppose a company has been grossly overvalued and the share price has recently retraced close to its 52-week low. Why should the stock price have any bearing on whether the company is now an attractive investment? A stock trading at its 52-week low may simply mean shares are less overvalued than before. The company's low share price may also be because of a broad market correction which has nothing to do with a company's underlying fundamentals.

It Is Easier For A Low-Priced Stock To Double

I am at a complete loss as to why the doubling of a $5.00 stock is easier than the doubling of a $200 stock. This myth is, once again, based solely on a company's stock price which has no bearing on the quality of the underlying business.

Invest In High Dividend Yield Stocks

Some income-seeking investors rely on the dividend yield metric as the primary investment decision-making factor. This is risky.

Companies are under no obligation to pay dividends to shareholders or distributions to unitholders. They have the right to cancel, alter or delay dividends at any time without reason or warning.

Some stocks have a high dividend yield because the stock price has plunged so much because investors are concerned about the underlying fundamentals of the business. History is littered with defunct companies that had extremely high dividend yields. Radio Shack is one example that readily comes to mind. Another terrible company is Pitney Bowes Inc. (PBI). The current dividend yield is 2.38% but its dividend history is indicative of just how dire things are with this company. Look at a 20 or 30-year dividend graph. We see that PBI's dividend yield has exceeded 7% on several occasions and the current low dividend yield is the result of dividend cuts.

Invest In More Companies To Diversify

Diversification reduces stock market investment-related risks and adds value when the new asset added has a different risk profile.

Wise Men Profit More From Fools

Merely adding more assets with a similar risk profile until your investment performance replicates the averages is known as diworsefying. Adding U.S. equity ETFs to an already diversified portfolio of U.S. stocks is an example of this.

It Is Impossible To Beat The Market

Some investors think it is impossible to beat the market.

Consistently outperforming the broad S&P500 benchmark is certainly challenging but not impossible. You do, however, need discipline, patience, and research.

A good strategy to follow is to invest in high-quality reasonably valued companies and to have a long-term investment time horizon.

Switch To Bonds When You Retire

Everybody's situation is unique so this strategy is not appropriate for many people.

When you invest in bonds you are a loaner. When you invest in equities you are an owner. Properly managed companies are operated so the return on equity outperforms the cost of debt.

A few decades ago, money could be invested in bonds bearing double-digit interest rates. Now it makes little sense to buy Canadian and US bonds given their very low coupon rates. If interest rates start to creep up, bonds will not necessarily be where you should invest your money.

Stock Market Investing Is Too Complex for the Average Investor

The average investor will certainly make several common mistakes that negatively impact investment returns. Many investors would also be wise to simply buy a passive index fund that tracks the S&P 500 as opposed to investing in individual equities.

This does not, however, mean the average investor should give up on buying stocks.

Successful equity investing requires time, research, patience, and discipline. Jumping directly into the stock market without any investment knowledge and simply hoping for the best is a risky strategy. The best way to learn is to get real-life, hands-on experience.

I recognize investing in individual equities can be daunting. This is why I chose to create this blog. I have been investing in individual equities for ~34 years and have had a reasonable degree of success. I am merely trying to impart what has worked for me.

You Need A Lot Of Money To Invest

Not so! You have to start somewhere and most successful investors start when they have little money.

In some instances, investors are wise to start investing through low-cost Exchange Traded Funds (ETFs). Blackrock has a variety of ETFs but this is not the only firm with a broad offering.

I am currently working with a couple of investors in their early/mid-20s. Our strategy is to regularly deposit funds in self-directed investment accounts (Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) and non-Registered accounts). Once sufficient cash had been accumulated, we purchase several shares in attractively/fairly valued high-quality companies. Examples of high-quality companies in which they are currently invested include:

  • Brookfield Asset Management (BAM-a.TO)
  • Mastercard (MA)
  • Visa (V)
  • Johnson & Johnson (JNJ)
  • Intact Financial (IFC.TO)
  • 3M (MMM)
  • Berkshire Hathaway (BRK-b)
  • Ecolab (ECL)
  • Enbridge (ENB.TO)
  • The Royal Bank of Canada (RY.TO)
  • The Toronto-Dominion Bank (TD.TO)
  • BCE Inc. (BCE.TO)
  • Alimentation Couche-Tard (ATD-b.TO)
  • Stryker (SYK)

Buy What Is In The News

The problem with buying what is in the news is that the news becomes stale very quickly once the news actually breaks. By the time the news breaks, many experienced traders are already exiting the trade. They bought the rumour and are now selling into strength as a wave of newbies buy shares.

Investors should not act on impulse. It is important to analyze the bigger picture and to identify opportunities BEFORE a company becomes the 'flavour of the day'.

Your Money Is Always Safe With an Investing Pro

Really? Ask any investor who invested with the firms owned and managed by Bernie Madoff, Allen Stanford or David Dominelli.

Brokerage Trading Costs Eat Away At Profits

This is certainly the case if very active trading is the modus operandi.

Trade commissions were much higher when I first started investing in equities. Now, self-directed investment fees are closer to $9.99 + $1.25/contract when done online and no assistance is required from a trade representative.

My trading costs are extremely low because I do not actively trade. For example, in November 2020 I paid just under $74,000 to acquire 200 shares in Lockheed Martin Corporation (LMT). My $9.99 fee was negligible in the grand scheme of things.

Some brokerage firms tout their no fee structure. This is a marketing ploy. These firms need to make money and embed their fees in the price of the equity purchased. For example, an investor may be able to purchase shares through a self-directed broker at $65/share. The same number of shares in the underlying security purchased at the very same time through these no-fee discount brokers, however, is over $65/share.

There is no such thing as a free lunch!

Fees Are Typically Too Small to Hurt My Returns

On the flip side, there is the myth that some fees are typically too small to hurt investment returns. Investment instruments with a 1% annual fee based on the value of the underlying assets, for example, really erode an investor's returns over the long term.

Read this Securities and Exchange Commission Investor Bulletin on How Fees and Expenses Affect Your Investment Portfolio.

Stock Market Investing Is Too Time-Consuming

Being constantly glued to computer monitors and business news networks is the image of a day-trader. This method of investing is certainly time-consuming. It, however, is day-trading and is not investing. Day-trading is where a job is traded for something that takes up just as much, or more, time.

Financial freedom is about having time to do the things you want to do and when you want to do them with the people who mean the most to you. I am not quite sure how many active day-traders can say they have achieved financial freedom.

It certainly does take time if the plan is to be a self-directed equities investor. This is especially true at the start. It does not, however, need to be time-consuming as you gain experience.

If time is truly an issue, invest in a small basket of passive ETFs.

Do not believe the myth that investing in stocks is a full-time job. The time spent managing stock investments is entirely up to you. I manage our investments in under 2 - 3 hours a month.

You Do Not Actually Lose Money Until You Sell A Stock

I do not quite know how some of these myths arise!

It is utterly preposterous to think no money has been lost until the loss is “locked-in” through the sale of the investment.

This thinking is certainly correct if the share price of a high-quality company drops. Looking back to the Financial Crisis or March 2020, the share price of many companies plunged. Long-term investors who focus on the underlying fundamentals of a company hold their investments through such market conditions. In fact, such market conditions present buying opportunities.

Speculators or inexperienced investors, however, typically panic during such sudden and significant share price pullbacks. People who fit these profiles sell at the worst possible time thus crystalizing losses.

Some companies are of grossly inferior quality and suffer a permanent impairment to their business. They really have no chance of recovery. Such investments are truly a loss even if shares are never sold. Some investors never sold their Kodak, Nortel, Polaroid, Enron, CommerceOne, or JDS Uniphase shares. Does this mean these investors did not lose money?

You Can Not Live Off Stock Market Profits

Speaking from personal experience, this is certainly not true. I KNOW it is possible.

Living off an investment portfolio depends on factors of which the:

  • present and projected cost of living;
  • life expectancy;
  • size of the investment portfolio;
  • rate of return.

are key factors.

It can certainly take time to create a portfolio of equity investments that will generate sufficient income to cover expenses. Even if the income generated is insufficient to cover all expenses, it can at least cover some expenses.

Everybody's circumstances are unique but to think it is not possible to live off stock market profits is a myth.

Follow Your Instincts When Investing

In life, we learn to trust our instincts. Sometimes our instincts serve us pretty well. Given this, it is not surprising to think a little investing knowledge is better than no knowledge.

This is not necessarily the case with investing. It is crucial individual investors have a clear understanding of what they are doing with their money. Investors who do their homework succeed. Investors who rely on instinct generally fare poorly.

Making money with equities is an analytical game to a greater extent than a gut game. In fact, many psychological biases play tricks on our minds and cause us to make poor investing decisions.

If A Company and Product Are Good It Must Be A Good Stock

It is human nature to think a good company that produces good products, or that provides good services, must be a good investment. This is true in some cases.

The issue is there is far more to investing than just good products and good services. Some good products belong to poorly-managed companies where executive priorities are not necessarily aligned with that of shareholders.

Some companies and industries also face significant headwinds that could make it very difficult to generate adequate shareholder returns going forward.

Other companies are grossly overvalued. Ask shareholders who invested in Intel Corporation (INTC), Cisco Systems (CSCO) and Microsoft (MSFT) at the height of the dot com bubble in late 1999/early 2000.

A great company and a great product is a solid place to start investment research but that is about the extent of it.

Fast-Growing Companies Make Great Investments

The speed at which a company is growing does not necessarily translate into a great investment. There are things other than sales growth to consider when buying a stock.

Some research has found that significant sales growth does not always bode well for a company's stock. Fast-growing companies tend to be overvalued as excited investors bid up their share price. Also, very rapid growth can strain the company's Free Cash Flow and bottom line. Some companies grow so quickly that they encounter liquidity issues.

Growth is great but it must be considered in the context of many other factors.

Avoid Volatility And Risk

It is tempting to try to get the benefits of stock market investing without the risks involved. Counting on defensive stocks as protection from the next market crash, however, is foolish. It does not matter how a stock has historically performed. There is no guarantee it will not be vulnerable to the next bear market.

Following the Financial Crisis, investing in low-volatility stocks became a big trend. Investors wanted to invest in equities but did not want to be subject to sizable swings in major benchmarks such as the S&P500.

Several low volatility ETFs were introduced in 2011 to address investors' needs for lower-risk products. The stated objective of these ETFs was to invest in stocks whose price movements had historically been less volatile than the overall market.

Fast forward to the coronavirus bear market in early 2020. Old rules were turned on their head. Low-volatility stocks failed to deliver on the expectation that they would suffer less dramatic hits than their higher-volatility peers.

As it turns out, many highly volatile, high-growth tech stocks were the best performers after April 2020. The COVID-19 pandemic made these companies essential because of their capacity to enable businesses to make a rapid digital transformation to adapt to public health measures like business closures and lockdowns.

Many traditionally defensive industries did not fare as well.

  • Financial stocks suffered as the threat of high unemployment forced banks to significantly increase reserves for potential loan defaults.
  • Industrial stocks had to shut manufacturing facilities.
  • Some consumer goods companies, especially those that sold less essential discretionary goods and could not quickly adapt their operations to a digital e-commerce model, suffered.

As it turns out, low-volatility stocks and the ETFs that own them fell just as hard as the overall market did during the downturn. To make matters worse, many of these companies have not bounced back like companies in more volatile sectors.

This goes to show that it is not always wise to have an investment strategy based solely on history. History does not always repeat.

Gold is the safest investment

If this is truly the case then I am in trouble. I have never invested in gold and have no intention of doing so. I do not even invest in mining companies.

Warren Buffett and Charlie Munger address the subject of investing in gold very eloquently at the 2000 Berkshire Hathaway AGM. The question posed by the shareholder is funny! If you want to skip the question, Buffett's response starts at the 1:50 mark and Munger's response starts at the 4:40 mark.

Well-Known Companies Make Good Investments

Talk to people who invested in:

  • General Electric Company (GE) in the first few months of 2000;
  • Kinder Morgan, Inc. (KMI) in the first couple of months of 2015

and have held shares in these companies since such time.

Avoid These 25 Investing Mistakes - Final Thoughts

Direct experience has taught me it is much easier to enjoy stock market investing when I avoid these 25 investing mistakes.

Steering clear of a few of these investment mistakes can literally make the difference between wealth and poverty.

Stay safe. Stay focused.

I wish you much success on your journey to financial freedom!

Note: Please send any feedback, corrections, or questions to [email protected].

Disclaimer: I do not know your circumstances and am not providing individualized advice or recommendations. You should not make any investment decision without conducting your research and due diligence.

I wrote this article myself and it expresses my own opinions. I do not receive compensation for it and have no business relationship with the company mentioned in this article.