So, you want to make money from investing in the stock market?
That is awesome. Personally, I believe the stock market offers a safe channel for us to invest in shares of great businesses to build sustainable long-term wealth.
But, with that being said, there are many pitfalls which might ensnare investors and thus, hindering them from building real wealth from the stock market. This often occur to new investors who have no idea about what stocks are, what the stock market is, and how money could be made safely from savvy investing.
In this article, I’ll reveal and discuss briefly what the pitfalls are so that you may avoid them. More importantly, through this write-up, you’ll learn more about a value investor in terms of his thinking and how he invests in the stock market.
Pitfall #1: Having No System
Many people want to make money from the stock market.
The quicker, the better.
They have dreams and fantasies of how they would buy a certain stock at $1.00 and would sell them at $1.50, $2.00, … etc in a short period of time.
Some even dream about owning multi-baggers.
But, don’t get me wrong. I am for dreams and visions. Nothing happens if none of us dream. So, please dare to dream big.
With that being said, many people want to make money. But, many ignored the importance of having a system to make money sustainably in the stock market. They do not have a system in place to sift out good stocks from bad ones which caused many to experience inconsistent investment results.
How can one attain consistent results when he has both good and bad stocks?
Therefore, Rule #1 in stock investing is to first set up an Investment System that is efficient to make money in the stock market sustainably.
Pitfall #2: Chasing Hot Stocks
This is a continuation of Pitfall #1.
With the absence of an Investment System, many new investors would buy and trade stocks blindly for they are more prone to stock tips, rumours, news, … etc sourced from friends, families, brokers, analysts, gurus, and publications, either online or offline. Information is plentiful. Intelligence to decipher is lacking. The result is catastrophic with many had invested into stocks that should have been avoided in the first place.
Investors would have done better without the information stated above.
In contrast, value investors who are able to make profits consistently from their investments would find money-making stock information from elsewhere. For a start, they include information obtained from official documents which include: Annual Reports, Quarterly Reports, Press Releases and Investors’ Presentations.
Regrettably, most retail investors do not read them. It is a costly mistake. This is because you can’t tell a good stock from a bad stock without reading them. It is a bet or a gamble if you buy stocks without reading the above documents. So, if you do not know how to read them today, it’s okay. Start learning about it. That would be your homework to become a better investor.
Pitfall #3: Buying Expensive Stocks assuming they are cheap.
Many people think that a stock which trades at $1.00 is cheaper than one stock which trades at $10.00.
It is flawed thinking.
Let me put it this way.
You are two choices between two tins of Milo: Tin A and Tin B. Tin A is priced at $10.00 and Tin B is priced at $12.00. Which of the two tins is cheaper?
Some of you may ask: ‘How big is Tin A and Tin B?’
If that is you, I believe you are getting the idea. It is very possible for Tin B to be cheaper than Tin A.
If we find that Tin A contains 500g of Milo Powder and Tin B has 850g, then, it’s obvious that Tin B offers better value than Tin A in terms of the amount of Milo Powder per Dollar and thus, is cheaper. You get more Milo Powder per Dollar if you buy Tin B than Tan A.
Likewise, stock prices alone does not tell you whether or not a stock is cheap or expensive. Stock prices should be compared relatively with its earnings to really find out of its true worth. This would tell us effectively whether or not a stock is undervalued or overvalued, which enables us to make better decisions.
Pitfall #4: ‘Fairy Tale’ Investing
Many people hope that the price of their stocks would go up after they bought their shares. They would be disappointed if their stocks behave otherwise. This is especially for people who intend to reap quick gains from buying these stocks in the market. I call it ‘fairy tale’ investing as it is not realistic.
This is because it is only realistic to expect one of the three things to happen as soon as you bought shares of a company (stock).
First, the price will go up.
Second, the price will go sideways.
Third, the price will go down.
It is nothing new. But, the difference between the masses and value investors is that value investors have a game plan for all of the three situations above. True investors are prepared to face them financially and mentally for ups and downs in stock prices are the norms in the stock market.
Pitfall #5: Not Learning from Mistakes
It’s okay to have mistakes made or money lost from unwise investments. Learn from it. Grow from it. Don’t waste your ‘tuition fees’.
But, due to culture and upbringing, it can be difficult to admit a mistake. This is because a mistake may indicate that we are ‘stupid’ and it can be embarrassing.
Instead of admitting our lack of knowledge, we have the tendency to place the blame onto the market, the government, the broker, the analyst, the CEO, CFO, or Chairman of the company … etc for our own mistakes. It is human nature to put some blame on others so that we don’t look foolish by ourselves.
That is totally understandable.
But, it is not healthy when it comes to stock investing.
Post-mortem is necessary to help us grow as an investor. Without it, you would most probably think that stock investing is just too risky and not for you.
Therefore, if you had made stock investment mistakes in the past, it is okay. Do not give up. But, before you make your next move, make sure you studied your mistakes and learn from them so that you don’t repeat them in the future.
Evidently, what I wrote above is brief and insufficient to transform you into one heck of an investor. It is not meant to be technical. Rather, it is my pleasure and intention to share a thought, a belief, and an idea on the differences between a value investor and the masses who are merely trying their luck in stocks.
Once again, let me point out their pitfalls and rules that value investors apply in their stock investments:
- Have an Investment System.
- Read Annual Reports, Quarterly Reports, Press Releases & Investors’ Presentations.
- Low Price may not be Cheap. High Price may not be Expensive. Do Valuation.
- Buy in expectation that a Stock would Go Up, Sideway, and Down.
- Do Post-Mortem and learn from mistakes.