There are many ways to make money on Wall Street, but there are also plenty of ways to lose it. Being aware of both will go a long way in making the right investing decisions. Here is a list of 10 ways to lose money when investing, as per The Market Cynic in the late 1930.
Before we jump into the list, I think it's important to note that even though these reasons were formulated in the 1930's, they still hold true to this day. While lots of things have changed over the past century, human psychology and investor behavior often remains consistent. Without further ado, let's jump into the list:
1: “Put your trust in board-room gossip”
Never make an investment decision blindly based on what the management of a company is telling you, always do your own research and don't rely solely on taking things at face value. Not every team has the investor's best interest in mind.
2: “Believe everything you hear, especially tips”
This fits well with the first point, but is more aligned with what you hear from other investors and analysts. Strong conviction and a solid investment strategy is built through your own hard work and the research you put in.
3: “If you don't know, guess”
One of the biggest mistakes you can make as an investor, is not knowing what you own nor being aware of what would make you want to buy more or sell your stake. Relying on gut feeling and a stroke of luck, especially over the longer term, won't work.
4: “Follow the public”
This fits well with a quote from William Jevons:
“As a general rule, it is foolish to just do what other people are doing, because there are almost sure to be too many people doing the same thing”
Think and act independently when investing, if an asset class is crowded and lots of people are talking about it there is a good chance most of the upside has left the table.
5: “Be impatient”
In the stock market, things don't always happen in the timeframe you have envisioned and expecting it to be different for your investments will often lead to disappointment. Conviction is key here, as it will help you stay the course and make rational decisions.
6: “Greedily hang on for the top eighth”
Just like it's almost impossible to time the bottom of any given correction, trying to time the top of a run is a risky endeavor. Allowing greed to take over as you try to get every last basis point out of an investment will not end well the vast majority of the time.
7: “Trade on thin margins”
Trading on margin in general brings with it its own risks and rewards, but when these margins become thin is when the real risk occurs. Be aware of this and in the same light, make sure to have a safety net in place to catch you if things do go south.
8: “Hold to your opinion, right or wrong”
Knowing when you are wrong is just as important, if not even more so, as knowing when you are right. If the facts that made you invest into a company or sector change, it is paramount that you adapt accordingly. Don't stubbornly hold on.
9: “Never stay out of the market”
There is no rule which states that one should be invested at all times. There will be moments where it is better to stay on the sidelines, for a variety of different macro and/or personal related reasons. Remember, cash is also a valid position.
10: “Accept small profits and large losses”
Former fund manager Peter Lynch once very adequately stated that:
“Selling your winners and holding your losers is like cutting the flowers and watering the weeds”
This will often greatly help compounding the value of your portfolio.
Bonus entry, 11: “Forget that markets are cyclical”
Equity markets have been cyclical for ages and that is something that won't change. Often times after a specific asset class has outperformed for a long time, another takes over the mantel. The best example of this is the energy and commodities markets, which have now started another bull market after a decade of relatively weak performance and underinvestment.
That marks the end of the list, thank you for reading and I hope it proved to be informative. Investing is a personal endeavor and therefore only you know your own risk tolerance and portfolio strategy. Take responsibility, work hard and learn from your successes and mistakes. Best of luck out there in the markets people!
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