Tuesday, April 21, 2009

Investment Mistakes To Avoid

* Don’t invest without a plan! First and foremost, every investor must have investment plan and goals set firmly.

* Don’t hold on to stocks that are making losses. People do this in the hope that there will be a turn around in the price and then they can exit at the buying price.

* Not diversifying sufficiently. Diversification is the basic rule to observe if you desire success, at least desire to minimize risks associated with the stock market investment.

* Investing without studying the stock. You must study every aspect of the company that you wish to “buy” on the stock market. Details of the company’s financial aspects are available everywhere, but still it is found that people just rush in to buying a stock without proper investigation.

* Don’t get attached to the stock. Often people have “favorite” stocks and they hold that stock forever even when it is either not moving, or is going down! Review your portfolio regularly and take actions, even sell it, if a stock is showing negative trends or losses. Emotional investment is not a part of the successful stock market investor.

* Ignoring risks. Don’t ignore the risk factors in the investment.

* Using tips from friends and other sources without doing appropriate research and analysis.
Investing and finding the right stock is never an easy job. To become successful investor, you must do research and analysis of every stock that interests you. Even if you trust the friend, you must still do further analysis before buying the stock.

* Following the crowd. You should avoid crowd mentality in stock market investing. To quote Warren Buffet,” You are neither right nor wrong because the crowd disagrees with you. You are right because your data and reasoning are right.” He echoed the same thoughts while warning the investors against following the crowds. “Be fearful when others are greedy and greedy only when others are fearful,” he said.

*Frequent trading.

* Not listing your mistakes and failures. Even the great Warren Buffett, one of the richest man in the world who made his billions on the stock market, lists his mistakes and failures. He then vows not to repeat them. So, knowing your mistakes will make you cautious and will force you to take the right actions the next time a similar situation occurs.

* Focusing on earnings per share and not on return on equity. Earnings per share is a smokescreen, because usually the company retains earnings to increase their equity base.

* Buying a stock and not the business! Warren Buffett has advised investors to buy the business and not just its stock! He has good reasons to say so.

To quote Warren Buffett:
“An investor should only buy shares in a company which he would be willing to purchase outright if he had sufficient capital. From this perspective, an investor should look for a company with business operations that are understood, has favorable long-term prospects, is operated by honest and competent people and is available at an attractive price.

The decision to buy a business is based on:
Business tennets
Management tennets
Financial tennets
Market tenets.”

‘‘The market, like the Lord, helps those who help themselves. But unlike the Lord, the market does not forgive those who know not what they do.’’

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