Three Biggest Mistakes

“I measure what’s going on, and I adapt to it. I try to get my ego out of the way. The market is smarter than I am, so I bend.”
– Martin Zweig

I have been in and around the markets for about 43 years (but who’s counting), almost 20 of those years a Stock/Commodities broker, registered advisor, and money manager. I’ve seen investors swindled, bamboozled, conned, and charmed. I have seen bright young men come into the market with brilliant new ideas and shine like stars — until their stars imploded. I’ve seen crotchety old men who had been predicting a market change be proven right — after 20 years of being wrong. Here are some of the biggest mistakes I have personally witnessed, that traders and investors make and the reasons (to the best of my knowledge) they make them. Everyone myself included is tempted and even succumb to at least one of these mistakes from time to time. Realize what they are and avoid them like the plague.

1. Don’t put too much money in any one idea – because you never know, despite what you may think, the outcome of any particular stock or the market in general. By limiting each investment, you’ll never get hurt so badly that you won’t be able to keep going. I have seen this too many times in my career and think of only two reasons why someone would do this:

  • You want to make a big hit — and don’t want to spend the time to research other possibilities.
  • Your broker, friend, or relative intimidates you into buying more than you want.

2. Never invest in something just because you like the story behind it — because a story, by its very nature, is meant to dramatize, not to inform. Why would someone abandon a sensible strategy to buy into a hot story?

  • Greed -> You know it violates everything you have learned about investing, but you’re willing to take a flier because the money sounds too good to pass up. If it sounds too good to be true, it probably is!
  • Inexperience -> It’s the first time you’ve fallen for a good story, so you don’t understand that good investments don’t always have good stories and good stories are usually just that — stories.

3. Don’t leave money in an investment after it turns south. I have good investment-expert friends who will tell me I’m wrong about this one, but my feeling is that when businesses start to fail, most of them, most of the time, continue in that direction. Why would you keep your money in an investment that goes down instead of up?

  • Pride -> You don’t want to admit you made a mistake. So long as you leave the money in the investment, you don’t have to admit you were wrong.
  • Foolishness -> The facts proved your theory wrong, but the broker tells you another story that promises a recovery and more profits. You’ve fallen for one story, and now you fall for another.

Think about your experience. Has it been less than satisfying? If so, what are you going to do about it? Blame others? If you are willing to take responsibility, you are going to have to make some changes in your behavior. Admit that you are not smart enough to always have the right stock. When the market proves you wrong by moving against you (i.e., when your exit strategy executes), sell your position.

Recognize that you don’t always have the right idea — and the same is true of your adviser(s). Stock pickers blow hot and cold. Even the best ones will be very wrong on a regular basis. If your system is sensible — with no more than 3% of your portfolio risked in any one security and a strict trailing-stop — you won’t have to worry about believing the next good story. Train yourself to be reasonable in your expectations. Yes, you will lose money, sometimes, but it will never be so much or so often that you’ll have to worry about it. As the years go by, you’ll get wealthier and wealthier. Not by a huge amount — but by a percentage big enough to make you happy and comfortable when it comes time to slow down and rely more on your passive income.

Enjoy Your Weekend!

Reprinted from a 2005 Prudent Trader article.

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