Tuesday, May 17, 2005

How soon can I have your office?

I'll explain the title in a bit, but first on to some investing mistakes.
First, I'll post some of mine and then include others that were left as comments or emailed to me. Below that I'll post some I found online that haven't been included.

Investing Mistakes

Some of mine...
  • Forgetting to look at the macro picture. The macro picture will include how the overall U.S. economy is doing, but also how the specific industry of the particular stock is doing. I would sometimes concentrate only on that one particular stock and not keep track how its competitors and overall industry is performing.
  • Not keeping great notes. I think many investors are guilty of this one. I would come across stocks I'm interested in, but never write down the reason why I was interested! Then months later I find a post-it with some ticket symbols, and I have no clue about them. In the Random Thoughts today of The Kirk Report, he mentions a software that's like putting electronic post-it notes. I've used a similar program and it's an easy way to keep notes.
  • I'm learning to keep my emotions in check, but I have made brash decisions for no particular reason. For instance the stock might be having a bad day and I want to keep my gains so I sell, but for no good concrete reason.
A few others noted
  • Not having an entry/exit plan for each trade. I think this is a very important one to note. When looking at a particular stock you should always have an entry and exit plan. This may be particular prices (buy if it drops to $17, sell when it hits $30) or even a range (buy anywhere between $16.50 and 17, sell anywhere between $35 and $37) but make sure the range isn't too wide.
  • Cutting your losses. I would think this is probably the biggest psychological mistake investors make. Too many times people hold on to a stock, when they should just get out. It's hard because you're admitting you screwed up (in most cases) and bought the stock at the wrong price. By selling you're admitting this, by holding on investors downplay their mistake and wait for a rebound. This rebound could take years, or never happen at all. I think it's best to just cut your losses, tell yourself you messed up, and then figure out what went wrong.
  • Not paying attention to fees. This is a potentially big one for some because they are basically giving away money. If you have two funds that invest in large cap stocks that correlate strongly with the S&P, why would you own the one with higher fees?
  • This one goes with the one above. Leaving money on the table. Maybe some are paying higher fees, or paying too much in commissions, or not reinvesting dividends. What ever it may be, all this amounts to money left on the table. Some might say "what's the big deal, it's only a 1% difference?". Well those 1% differences add up over time! Yeah, I'm talking about compounding. Here's one example: two guys start with $10,000 and invest another $1,000/year for 40 years. The first earns 10% and has continually left 1% on the table from various things (nothing too big right?), he ends up with: $895,185. The other guy tries not to leave anything on the table and earns 11%/year. His total: $1,231,834! This is about 37% more than the first guy!
Here are some I found off various websites
  • Not doing your homework
  • Letting short-term noise affect your long-term investing decisions/horizon
  • Falling in love with a stock
  • Not diversifying
  • Being overconfident
  • Selling the winners and holding the losers
  • Misunderstanding risk
Everyone makes mistakes. What matters is what you do after making the mistake. Learning from your mistakes is one of the most valuable things you can do.

Time to explain the title. Today, someone posted a comment under "The Interview" post about an interview with Morgan Stanley. The poster might not be feeling too well about the interview and I saw this article about weird things that have happened during interviews: it's a funny read and a few laughs are a good way of getting out of a funk. The title of this post refers to a question a candidate asked during the interview.


Mike said...

On keeping good notes. . .I use Onfolio to keep my notes for me. Onfolio allows you to save full pages from the web as local copies, or snippets of web pages. Within Onfolio (http://www.onfolio.com), I have an investing collection with a stock folder that contains subfolders for every stock that I follow. I title these folders with the name and symbol of the stock. When I find research and or want to add some notes, I save it into the stock's folder and the data is always there for me to go back to. I also save overall research articles, etc.
Disclaimer: I work for Onfolio. Check out the product though and kick the tires a bit, I find it's best use is for my investment research, but you can see for yourself.

Warm regards!

Mike said...

BTW, great blog. I have been following it for about 2 weeks now and will continue to do so. I follow many different investing/finance blogs and this is one that I read rather than skim.

Alpha said...

Thanks Mike for the comment!
I checked out Onfolio and it looks pretty cool. I'm going to try to download a trial version soon.