I had a conversation with a friend about his recent investment in the stock market. 

His experience isn’t one he was happy about… or wanted to share.

He had just lost his life savings and was devastated. He couldn’t understand where he went wrong. After all, he was told by his colleagues that the stock market was a great place to invest and make fantastic returns (It still is!!)

 

 

When I probed further, I discovered he had made some wrong decisions… he had made the same mistakes many beginner investors make when investing in the stock market. And now, his over 5 years of hard work and savings have gone down the drain.

Where did he go wrong? What mistakes did he make?

In this blog post, I’m going to share with you 5 mistakes beginner investors make when investing in the stock market.

Let’s explore them.

 

1.   NOT HAVING AN INVESTMENT PLAN

The major mistake new investors make is to enter the stock market with no goals or objectives.

Goal setting is vital to reaching your financial success. It helps you narrow your focus, tracks your progress, and provides clarity around what you want.

To understand better what your goals are, you need to ask yourself the following questions.

• How much income am I willing to invest? Your income provides the natural starting point for investment goals. Without an income, there is no investment
• Am I investing for long-term or short-term goals?
• What are my entry and exit strategies? ( Entry point is knowing the best time to invest to maximize wealth creation while exit point is setting your limit selling at a point where you get out from investment to minimize capital loss).
• What % return do I desire and over what period?
• At what point would I need to restrategize?
• What are my risk and reward targets?

These questions will help you define your goals which will ultimately inform your business plans to be achievable,      relevant, and time-bound.

 

2. NOT CONDUCTING ADEQUATE RESEARCH BEFORE INVESTING. 

To have a successful financial future as an investor, you must conduct a thorough research about the company you want to invest in.

Bill Gross, a renowned American investor said “Finding the best person or the best organization to invest your money in is one of the most important financial decisions you’ll ever make.” 

We can’t agree any less with him. Your due diligence through adequate research helps you understand your chosen market, and track the past and present growth to better predict the future.

 The guidelines below would help you research adequately and make sound decisions about the company, before investing:

• Find out the cash flow generated in the company, within a year.
• The current and future business climate?
• Check if the management team operates the business with skill and integrity.
• Research the company’s business model, competitors, and target market.
• Evaluate the company’s yearly increase, over some time to know if it’s growing.

 

3. LACK OF PATIENCE AND DISCIPLINE

Warren Buffet, the most successful investor said “We don’t have to be smarter than the rest. We have to be more disciplined than the rest“

This is one of his proven strategies for his success story. To be a successful investor, your emotions have to always be in check.

Don’t approach the stock market as a left-hand alternative source to make money, understand that there are technicalities you must stick to minimize capital loss.

Let’s say you buy stock for $50 that fails to hit your target within months, your brain perceives a threat to your investment, and it automatically wants to do something, which translates to selling the stock. 

Suddenly, that stock appreciates, but unfortunately, you’ve sold it already. You paid attention to your emotions and neglected your well-planned strategies.

Developing your currency investing plan, and waiting for the right investment opportunities requires patience. Patience and discipline are values a good investor must possess. 

Don’t try to position yourself to time the market and chase a trade. If you’re disciplined and patient, you’ll make a profit in the stock market. 

 

4. INVESTING IN A BUSINESS WITHOUT A COMPETITIVE ADVANTAGE

Buying shares in companies without a competitive advantage is more or less gambling. Competitive advantage is a structural aspect of a business that enables a company to defend its profits from competitors.

Companies with a strong competitive advantage succeed more in their industry.

When you invest, you want to have massive protection from attacking competitors, leading to generating large funds.

Take a look at the company you want to buy and figure out durable protective qualities that will keep them relevant for decades.

If a company has one or more of these defense mechanisms listed below, then it’s worth your investment.

• Companies that have succeeded in replacing a generic thing with its brand. For instance, Apple makes a specific ecosystem that says “My Apple Watch is easily connected by just turning it on to a device“( iPhone, iPad, desktop). These specifics keep them relevant in their industry.
• Companies that can keep up with inflation. They raise their prices and it doesn’t stop people from purchasing their products. For instance, if the price of sugar appreciates, the Coca-Cola company simply raises the price of their product, and people still buy them.
• Companies that provide a service at a lower cost than that of their competitors.  

Investing in companies that are tough in the face of competition is crucial to becoming a successful investor.

 

5. INVESTING FOR THE WRONG REASONS

Getting investment information on stocks to buy from friends and relatives isn’t a bad thing. It is, however, more important to consciously validate their claim.

Never go investing in areas you know nothing about and stick to your circle of competence, which may differ from that of your friends and family.

The more informed you are about your area of interest, the better your chances of success as an investor.

 

In Conclusion 

Before you put your life savings into an investment, be sure you aren’t making these five big mistakes to enjoy maximum capital appreciation and grow long-term wealth.

The list,  however, is non-exhaustive. We would love to hear some of the mistakes you’ve made as an investor, that aren’t highlighted above, in the comment section. If you’re a victim of any of these mistakes, do share it with us too.