Common Mistakes Most Investors Make

Posted by Oskar Syahbana
10/23/2006

Here’s a list from “How to make money in stock” by IBD founder and Chairman, William O’Neill. As usual, I will also add my comments by the end of each point, so here it goes:

Averaging down in price rather than up in buying. This holds true for some stocks but hold false for another. For instance, I have no problem on averaging down (buying lower than my previous entry points) if the stocks fundamental is good. On the other hand, I will never ever averaging up if the stock’s fundamental does not justify the upwards momentum.
Buying larger amounts of low-priced stocks rather than smaller amounts of higher-priced stocks. Again, this can be a double-headed-snake-statement. For value investor, it’s better to buy stock with strong devidend as they are mostly looking for how big the return a stock can give them in form of deviden (look to this post). On the other side, a growth investor will prefer looking on a low-priced stock that has a potential of stellar growth. So pick your trading (or investing) style that suits you.
Buying on tips, rumours, split announcements and other news events, stories, advisory-service recommendations or opinions you hear from supposed market experts on TV. The statement is partially true especially on opinions from ‘the outside world’. If their stock picking ability is so great, why would they sell news letters or sharing their ideas with others rather than capitulate it themselves and get filthy rich? But, all investors and traders alike must take caution on what the news holds for them. It can bring a good sentiment (new discovery of oil field from a company that you own is always a good news) or bad sentiment (options scandals anyone?). So keep an eye on announcements and other news events and make that only as one part of your buying decisions.
Selecting second-rate stocks because of devidends or low-price earnings (P/E) ratios. Again, the statement is half true and very vague. What is considered as a second-rate stocks? Does this mean a second-rate company? Does Samsung considered a second-rate stock because their company is trailing behind Sony (this is on the ferge of change though)? Buying a stock with a low P/E ratio is always good for those seeking an aggressive growth (growth investors), but be warry of why does the company has a low P/E ratio. Take this into account and your half-way on your excellent fundamental analysis class.
Never getting out of the starting gate properly due to poor selection criteria and not knowing exactly what to look for in a successful company. Now this is a daunting task for you. What is the recipe of a successful company anyway? Company that innovates? Look at netscape.com and look how once an internet innovator become a laggards. I agree totally on the “hanging your losers too long” though.
Not using charts and being afraid to buy stocks that are going into new high ground in place. Again, not using chart is not always a mistake, especially if you are an investors (I take here investors is anyone that hold stocks for more than a year). A thorough understanding of the stock and the market is the most important thing, for an investor, looking at the charts is a secondary idea (and not necessarily done). This differs much with traders though (those who keep the stock monthly and below), chart-looking (as if there were pr0n or anything) is essential for their lifeline.
Cashing in small, easy-to-take profits while holding the losers. I’ve done this in the past. But as an investor, your time and profit cushion is bigger. It means that if your stock picking criteria is right (I’m talking about CANSLIM here… read a morningstar book!), you will never see a loser. And don’t forget, if you pick the stock right, it will go beyond 100% gain in several years (I experienced this last year — too bad I don’t hold my winner longer).
Worrying too much about taxes and commissions. Even the mighty Al Capone got jailed because of taxes! You must not take this matter lightly but you should also never take this matter too seriously. Only do it once you are ready to exit your trade. For investors, the only commissions that you will pay is buy and sell commissions (considering you are only buying it once and keep it for the rest of the year before liquidating it).
Speculating too heavily in options or futures because they’re thought to be a way to get rich quick. In stock market, it’s possible to witness a 200%+ movement in 2 years, so there’s alot of get-rich-quick people here, just not that many since it doesn’t happened all the time. And as for futures, I’m all against it since there’s nothing to trade over there besides the aggregate sentiments of the market (I’m talking about index futures here, not commodities), so it’s pure speculations. And as for options, I think I’ll go with covered call strategy (meaning you buy a stock and start sell call for additional income — besides the upwards gain).