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Here are the 5 of the biggest reasons why people lose money in the stock market and how you can avoid these common mistakes.
#1: They incorrectly equate price with value.
The price of a stock is what you paid. The value is what you get behind the business. Mr. Market can vary the current price of a stock. This does not change the intrinsic value of the business in generating free cash for its shareholders and consistent profitability in the future. You increase your chances of losing money in the stock market when you do not take the time to assess if the business is best of breed in its industry or sector.
This means that you should spend a little time:
1. checking out the most important growth rates to assess profitability,
2. verifying if the business has an economic advantage over its competition,
3. ensuring that the management team is working for the shareholders and not ripping them off,
4. determining the intrinsic or fair market value of the business, and
5. purchasing the business with a margin of safety by buying it when it comes on sale.
#2: They let emotions get the better of them.
Rather than using a rational approach and sound reasoning to guide your decision-making process, you may get caught up in the hype surrounding the market. You end up buying when the stock is over-valued and selling pre-maturely, when the media is calling for the end of the world.
Panic and greed can set in, clouding one's judgment in making sound investment decisions.
Avoid getting swayed by the masses by looking for any significant changes in the company's fundamentals, emerging competition and market trends. If everything checks out, then in all likelihood you are better off being patient and ignoring the investo-tainment hype.
#3: They lack patience.
You may find that you are easily influenced by the media and stock investment industry hype and repeatedly move in and out of positions rather than being patient.
Very often by moving in and out of the market you do not allow adequate time for Mr. Market to price the stock at its true intrinsic value or fair market price.
This creates, more often than not, a scenario where you end up selling when you should be buying. As a general rule of thumb, sell what is doing the best and buy what is doing the worst in a hyped market. In other words, buy low and sell high.
Heed this advice no matter whether you are talking about stocks, bonds, real estate or commodities. If you have done your due diligence and verified that you are dealing with the best of breed in that class, then using a contrarian approach to what the panicked masses are doing can present some profitable opportunities.
#4. They let their mutual fund advisor control their portfolio.
Your mutual fund advisor wants to keep control of your money because he takes money out of your pocket and puts it into his through fees and commissions.
Rather than give up control, decide now to become an active learner. With a little patience, new-found knowledge and some practice you will be able to benefit immensely from investing in the stock market. Keep in mind that as long as you are thinking clearly you can invest in the stock market and reap the benefit of consistent high returns for decades.
#5. They over-diversify their holdings.
Diversifying in more than a handful of businesses is for the ignorant. If you know how to invest your money in a select number of "best-of-breed" companies, then you don't need to diversify your money into 100 or more stocks. Focus your money on a few businesses that have meaning to you, buying them at attractive prices when the market is fearful and selling them when the market is greedy.
Hopefully, by avoiding these 5 common reasons why people lose money in the stock market, you will be in a better position to consistently make more money over time.
Join us today by investing in your education at http://stockinvestingsimplified.com.
Disclaimer: Any information shared on Stock Investing Simplified does not constitute financial advice. Stock Investing Simplified is not a registered investment advisor or broker-dealer and does not purport to tell or suggest which securities readers or customers should buy or sell for themselves. The Website is intended to provide general information only and does not attempt to give you advice that relates to your specific circumstances. You are advised to discuss your specific requirements with an independent financial adviser.
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