Investing can be a very lucrative process. In fact, some of the most wealthy people in the world gained their wealth through the process. However, some mistakes can prove to be quite costly. Here are a few mistakes that beginner investors should avoid at all costs:
Mistake #1: Failing To Use The Tools Available To You
You’ll never walk into a mechanic’s shop without seeing tools. You’ll never go into a restaurant’s kitchen and struggle to find a knife. You’ll never meet a roofer that doesn’t have a hammer. The truth of the matter is that there are tools made for every job.
In the world of investing, there are tools that are taylor made to fit the job. Stock screeners, calendars, trading charts, and more can make a huge difference when it comes to the returns that you’ll experience in the stock market. Here’s a list of 5 tools that all beginner investors should have in their toolbox!
Mistake #2: Catching A Falling Knife
It’s tough to take a loss. In fact studies have shown that paying cash actually triggers pain receptors in the brain, creating a mental response that’s similar to physical pain. These pain receptors are likely the same receptors that are triggered when we take a loss in the market.
Naturally, when we feel pain, we want to heal the problem. Beginner investors often try to do so by purchasing more shares at a lower price, hoping that when the stock heads back up, all losses will be erased. However, this isn’t the case in most scenarios.
The truth of the matter is that in the stock market, losses will happen. However, chasing a falling stock is a lot like trying to catch a falling knife. Chances are that the end result will be more pain.
Mistake #3: Blindly Making Investments
Many beginner investors think that making money in the stock market is as simple as finding a company’s stock that you’ve heard the name of and buying it. However, this is never a good idea.
The truth of the matter is that even buying big names like Apple, Amazon, or Google could come back to bite you if the purchases are made when valuations are high.
The bottom line is simple. You should never make an investment without research. In fact, you should feel like you know the company, it’s finances and its prospects for the future inside and out before investing your first dollar.
Mistake #4: Taking A Friend’s Advice
Anyone that’s investing thinks that they’ve got the next big thing in their portfolio. However, the truth of the matter is that there are far fewer registered financial advisors than there are people that provide advice as if they were one.
While your buddy around the corner, friend from high school, or even your boss may believe that they’ve got the greatest thing since sliced bread in their portfolio, it’s never a good idea to blindly take their investment advice.
Sure, they’re friends and family, and if you believe they may be onto something, it’s likely worth digging into. However, you should always do your own research before making an investment.
Mistake #5: Ignoring The Value Of An Economic Moat
One of the most important lessons that beginner investors can learn from Warren Buffett is that when looking for a solid investment, you should always look for a company that has developed an economic moat. What is an economic moat, you ask?
An economic moat is something that gives companies a key advantage. For example, a long line of patents keeping competitors off of the playing field is an important part of an economic moat. Another key part is the ability to access the raw materials needed to create a product at rates that can’t be matched by competitors.
Essentially, anything that keeps competitors at bay acts as an economic moat, and investing in a company that doesn’t have one is like investing in a basketball team made up of nothing but benchwarmers.
No matter what you’re doing, if you’re a beginner, there’s a strong chance that you’re going to make mistakes. However, as a beginner investor, it’s important to do your best to avoid some of the most costly mistakes that can take place in the stock market. By avoiding the mistakes above, you’ll have a better chance of earning meaningful gains in the market.