Losing money is never fun. There are several patterns that make us losers with our investments. I pointed 8 things that make you lose money on the stock market. There is probably more than that but we all have to start somewhere, don’t we?
#1 You can’t admit it
Most people simply refuse to admit when they commit a mistake. This is why they keep their bad stocks until the end. They know they should not have bought this stock but selling it at a loss would confirm officially that they made a mistake. We rarely find people that are able to sell their bad stock in a heartbeat without looking behind them.
#2 You are greedy and scared
When your stock is going up and up and up, you might think of selling. But are you going to do it? Or are you going to wait for another to gain another five bucks a share? Thinking that you will always make a little bit more might make you lose big time. On the other side, one can sell his stocks after a short gain of 20% in order to cash-in profit right away. If you sell too fast, you might miss a great opportunity. Maybe the stock only starts to rise. The key lies in determining the initial reasons why you made that purchase. Then, you sell only when those conditions are not met anymore.
#3 You simplify everything
The price of gas is climbing; therefore you should buy stocks from Oil Companies. Human beings have this tendency of simplifying things by generalizing from a few observations. The world of finance is becoming so complicated and is evolving continuously. This is the main reason why we are trying to make shortcuts with our brain. Try to establish a more rational evaluation grid than the simple facts that you see.
#4 You are overconfident
If you think that you are the next Warren Buffet, that your 30% average yield over the past 5 years is enough to bring you over the average investor; therefore, you might be a little bit overconfident. I used to be overconfident with stocks myself. But I discovered that it was easy to make high returns for the past five years. The real investors will be able to obtain good results in the next five years. This is where we will separate the adults from the children.
#5 You are buying the flavour of the month
One of the most recent flavours of the month was bank stocks in general. The economy was steadily growing; they were making big bucks out of the subprime market and then boom! The subprime lenders go into a crisis. This is what is happening when you are buying what it is hot at the moment: it rises to a point that it becomes ridiculous. Then, it drops back to what should be its real value. If you were at the end of the increase, you will find the roller-coaster a bit hardcore for your portolio.
#6 You are looking at the past
In finance in general, we have this good old habit to look at what happened in the past. We take the last three or last five years results and we project them in the future. However, this is completely wrong. What tells you that the company will live through the exact same environment for the upcoming years? Nothing. If we take the bank industry for example, chances are that they won’t live another magical period in the near future. The interest rate has gone up, the Canadian dollar is now at par with the
#7 You are living in the past
Human beings have also this strange habit to go back in the past and think that they could have predict what would happen to a stock or an industry back then. It is easy to find a rational explanation to what happened when you have all the information and the graphs in front of you. Then, we think we are able to predict the future and replicate past tendencies. In fact, there are a very few of us that can predict the future. Don’t think you can look at graphs and obtain the absolute truth from them. Things are easy to explained, once they happened!
#8 You think you know your company
Your department just cracked their yearly objective, they are hiring and you receive a great bonus. That’s it! You invest your bonus into your employer’s stocks. It doe not mean that if you know what is going on in the inside, that it will actually being reflected in the future price of your company’s stocks (unless it is insider information, which results to be illegal). In fact, financial analysts probably know as much as you and your actual growth was expected and reflected into the shares price. Keep in mind that your department might be rolling; it does not mean that the whole company does.
In the end, if you can avoid these 8 psychological mistakes, you will have made a big step into the investors’ court. Being an investor corresponds to control your mind (and its emotional sparks) on a daily basis. Good luck with your investments!
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