The Top Eleven Investing Mistakes.
The Top Eleven Investing Mistakes.
by Natalie Pace.
Investing mistakes are easy to fall into because it’s what everyone else is doing and it feels like a time-saver. In fact, these common mistakes are not time savers at all. They are money losers, stomach acid burners and often even relationship deal breakers!
You’ll find some people make a career of "contrarian investing," where they simply try to do the opposite of what everyone else is doing, thinking "Aha! If these are the common investing mistakes, I’ll just do the opposite!" This is not a strategy that pays off either. There is simply no substitute for the 3-ingredient investment recipe that I’ve given you!
3-ingredient recipe for cooking up profits
1. Start with what you know and love
2. Pick the leader in the sector (in real estate, it’s location, location location!)
3. Buy low; sell high
So, stick to the recipe. Use the Stock Report Cards to help you Pick the Leader and determine whether you are buying low or not. And avoid the common mistakes that newbie investors make, which are more often than not, money losers.
You might "know better" than to fall into the pits of these common investing mistakes, and still find yourself tempted to cut corners, just to fit in or to save time. I encourage you to use this list as a checklist and reminder of why you are taking the time and energy to really get to know (and love) your freedom plan and the companies and products that you are investing in. And I’m including the rationale behind each mistake so that you’ve got an argument, in case you need one, with an overzealous friend, loved one or financial partner.
The Top Eleven Investing Mistakes
Mistake # 1. Trading on Analyst Recommendations
If you thought Jack Grubman and Henry Blodget (the former analysts who got in trouble for recommending stocks in exchange for favors) were just flukes, guess again. Following analyst recommendations is a losing proposition. Researchers at the University of California and Stanford found that, in the year 2000, the stocks most highly rated by analysts lost 31 percent for the year. Even more incredible is this finding from the study: The stocks least favored by the major analysts soared 49 percent. This study examined 40,000 stock recommendations from 213 brokerages. Analysts are not all crooks, but they are definitely not fortune-tellers.
Now, in all fairness, this is mostly just a case of supply and demand. The demand shrinks when the company falls out of favor with analysts, and soars when analysts become enamored. The trick is identifying tomorrow’s Cinderella company from the cinders – before the analysts publish their reports, something the Stock Report Card™ is designed to help you master. Click on Stock Report Card to access a blank report card template that you can use in the future. I recommend setting up a table in a Word or Excel document. That way you can sort by Price to Earnings ratio, to get a sense of which company is trading for a better price.
Mistake # 2. Bankruptcy Buying
Think buying Delta at $1.54 a share when you’re positive that they will come out of bankruptcy is a brilliant idea? Guess again. Reorganization plans commonly call for the cancellation of the existing common stock, with holders receiving nothing. Nada. (Translation: your stock becomes toilet paper.) Lawsuits are a difficult and costly way to try to recover losses.
Mistake # 3. Pet Rocks
It’s very tempting to buy stock after shareholders have earned seven thousand times their investment, or after the product sells four gazillion copies, but that is called chasing money. There were people, lots of them, who bought AOL Time Warner and Priceline at peak share prices in 2000, thinking that heavenly heights could last forever. Too bad losing weight isn’t as easy as losing money.
Mistake # 4. Hot Tips
Hot tips are often merely "Pump and Dump" schemes—a colorful name for the scheme in which scam artists send out tens of millions of e-mails or load the stock market bulletin boards with messages like:
"This one is going to SKYROCKET."
"50 cents today, $3.50 by next Tuesday."
"Hot stock on the rise. Must act now. Is trading at 29 cents, and is sure to trade above $2.00 by the end of tomorrow."
They pump up the stock, so they can quickly dump when enough suckers fall for the charade and buy.
The price goes up—but not because something great is fundamentally happening with the company. It goes up just because the promoters (who are probably paid) have duped enough people into buying. Then the insiders sell (quickly), which makes the price fall flatter than a stone. People who fall for pump and dump schemes typically lose their investment. Even if the company stays in business, it might trade at the same rock bottom price for years.
These kinds of hot tip scams abound with companies that are trading "off the boards," which are also called penny stocks. Any stock trading under $1.00 is likely to be trading off the boards (which means there’s less compliance with GAAP accounting and SEC securities standards). Never respond to a direct mail or e-mail campaign to buy a stock "NOW, before it explodes." No credible company would send a notice like that. The SEC has laws against solicitation of investments.
Assume hot tips are swampland in Florida unless proven otherwise by a gazillion independent, well-respected sources. Assume anyone who tells you that they have a "sure shot" that’s going to double, is lying, self-interested, or stupid.
Mistake # 5. Sure Shots
If someone promises to double your money in a set period of time, assume that you’re dealing with a novice or a scam artist, especially if they want you to write a check before doing any due diligence. If you’re dealing with someone who doesn’t acknowledge the risk, they are lying or very naïve. Beware anytime someone wants you to hand over money before you have a chance to read or research anything.
Mistake # 6. Buying on Headlines
Headlines are written by editors to catch your eye. If you don’t read the fine print, you could be missing the most important information. Before United Airlines declared bankruptcy, investors gobbled up UAL shares on the headline that United had received $1 billion in promised concessions from its unions. The investors assumed that this was great news and that the labor concessions were all that United needed to soar the skies once again and be profitable (with the help of some federal loans). A key consideration was hidden on the inside pages of the article, however: that the Federal Loan Guarantee required $1.5 billion in union labor concessions. In fact, receiving only $1 billion in concessions – when the loan was going to fall through unless $1.5 billion was delivered -- was very bad news, not the good news that the headline trumpeted.
The Loan Guarantee application was rejected, and United Airlines was forced into Chapter 11 only a few weeks after that headline appeared in what many people consider the country’s most reliable news source, the New York Times. The headlines of less respected news sources can be even further from the complete story. The New York Times had actually printed the complete story, but too many didn’t take time to read it.
Mistake # 7. Press Releases
Press releases are written by professional writers, who are employed by the company they are writing about. And press releases are not held to the same standards as the official corporate earnings statements that public companies must make with the Securities Exchange Commission. A company can talk about an increase in revenue without ever mentioning that increased revenues don’t mean the company is profitable or that, due to cash constraints, the company’s fiscal health is on the ropes. If you read anything that is from PRNewsWire or BusinessWire—services that distribute press releases written by corporate PR people—ask yourself, "What aren’t they telling me?" Press releases can have valuable data and information, but they are designed to give you a snapshot of something newsworthy, not to draw out the full picture.
Mistake # 8. Relying too heavily upon the advice of your broker
If your broker has handled your account beautifully over a period of time, don’t bother to read this Mistake; you’re lucky to have a partner who cares about your future and has the knowledge and expertise to get you there. Many investors don’t understand that most brokers are salesmen first, especially those with fewer years in the trade, and place too much faith in a broker’s knowledge, morals, and information. You wouldn’t marry a stranger, so don’t hand your financial life over to one either! (Read the article on Selecting a Broker for tips on how to find the perfect partner.) Find the article under the Investor Edu link on the home page at NataliePace.com.
Mistake # 9. Placing all your chips on one sector
Diversify! Even with blue-chip stocks and prime real estate, you risk losing all of your money. Enron did go bankrupt, just one year after it was added to Forbes Platinum 400 List, for revenue in excess of $100 billion. A freak fire destroyed a handful of homes in the prized Malibu Colony in California in 2007. When you have your assets diversified across different investment classes – from real estate, to stocks, to bonds, to money markets, to Treasury Bills, etc. – you are protected against any one fluctuation or disaster. And in all instances, make sure that you keep enough cash on hand and enough income flowing in to meet your expenses.
Mistake # 10. Keeping too much stock in your employer’s company
Rule of thumb: no more than 10 percent of stock in your own company.
There’s one exception to this rule: if you’re the owner of the company, you may need a dominating percentage of the stock for voting/power reasons. In the early days of Apple Computer, Steve Jobs was booted out of the company he had co-founded.
Mistake # 11. Handing your investments over to a loved one, relative or friend
I’ve spoken with women executives who have commanded billion dollar corporations, and others who have multi-million dollar salaries, who turned over their personal investment portfolios to a husband, in order to make him feel like "more manly." With men, it’s more likely to be the guy at the country club who convinces his poker partners to come in on a sure shot investment of his.
Money means different things to different people, but, chances are high, that whatever it means to you, it ranks pretty high on your personal Richter scale and can cause personal devastation in high dosages when tremors occur. If your friend, loved one or relative loses your money, it’s going to be hard to recover the relationship – no matter how much you like or love him/her. So, even though you might think it’s an act of love to entrust your future to someone, it’s really more like an act of annihilation. Somewhere down the road, the odds are high that person will make a bad decision (in your eyes), or there will be less money than you hoped for (if any at all), or there will be a falling out between the two of you, or simply the person wasn’t really qualified for that level of responsibility in the first place.
As Dr. Phil says – and yes, I’m quoting him – each partner in a relationship should have personal money that s/he can set on fire if s/he feels like it. Imagine how much more important it is for each partner in a relationship to control the life of her dreams and the financial means to get there. I’m not encouraging you to hide money, merely steer your own ship in this regard. Have some personal passions fueling your short time on this planet, and use your financial freedom plan to help you get there. Whether you are a mother hoping for a better home for your children, or a father preparing to send your kids to college or a bachelor building green skyscrapers or a nun building Habitat for Humanity homes, your desire for a better life is the motivation to have more money of your own to "play with."
Even if you hate investing, almost anyone can set up an auto-payment tax-free retirement account through an online discount brokerage in just a few minutes. Take, at least, that amount of time. The cyber broker, which is set up on Modern Portfolio theory, is a better strategy than having a loved one wing it with a self-penned, but poorly tested, plan.
Before you have your first child, it would be great to get a list of the top ten parental mistakes. Imagine how much easier it would be to know that the first time your child gets a scratch, you’ll mistake it for a gash and have to spend a thousand dollars on the ER. It’s really amazing how ridiculously easy common parenting mistakes are to the parent of four, who shakes her head knowingly at the rookie mom. The same is true of experienced investors. They know these tips like the back of their hand, and if you write it on your hand while you’re learning, chances are you’ll find more money sticking there, too.
by Natalie Pace.
Investing mistakes are easy to fall into because it’s what everyone else is doing and it feels like a time-saver. In fact, these common mistakes are not time savers at all. They are money losers, stomach acid burners and often even relationship deal breakers!
You’ll find some people make a career of "contrarian investing," where they simply try to do the opposite of what everyone else is doing, thinking "Aha! If these are the common investing mistakes, I’ll just do the opposite!" This is not a strategy that pays off either. There is simply no substitute for the 3-ingredient investment recipe that I’ve given you!
3-ingredient recipe for cooking up profits
1. Start with what you know and love
2. Pick the leader in the sector (in real estate, it’s location, location location!)
3. Buy low; sell high
So, stick to the recipe. Use the Stock Report Cards to help you Pick the Leader and determine whether you are buying low or not. And avoid the common mistakes that newbie investors make, which are more often than not, money losers.
You might "know better" than to fall into the pits of these common investing mistakes, and still find yourself tempted to cut corners, just to fit in or to save time. I encourage you to use this list as a checklist and reminder of why you are taking the time and energy to really get to know (and love) your freedom plan and the companies and products that you are investing in. And I’m including the rationale behind each mistake so that you’ve got an argument, in case you need one, with an overzealous friend, loved one or financial partner.
The Top Eleven Investing Mistakes
Mistake # 1. Trading on Analyst Recommendations
If you thought Jack Grubman and Henry Blodget (the former analysts who got in trouble for recommending stocks in exchange for favors) were just flukes, guess again. Following analyst recommendations is a losing proposition. Researchers at the University of California and Stanford found that, in the year 2000, the stocks most highly rated by analysts lost 31 percent for the year. Even more incredible is this finding from the study: The stocks least favored by the major analysts soared 49 percent. This study examined 40,000 stock recommendations from 213 brokerages. Analysts are not all crooks, but they are definitely not fortune-tellers.
Now, in all fairness, this is mostly just a case of supply and demand. The demand shrinks when the company falls out of favor with analysts, and soars when analysts become enamored. The trick is identifying tomorrow’s Cinderella company from the cinders – before the analysts publish their reports, something the Stock Report Card™ is designed to help you master. Click on Stock Report Card to access a blank report card template that you can use in the future. I recommend setting up a table in a Word or Excel document. That way you can sort by Price to Earnings ratio, to get a sense of which company is trading for a better price.
Mistake # 2. Bankruptcy Buying
Think buying Delta at $1.54 a share when you’re positive that they will come out of bankruptcy is a brilliant idea? Guess again. Reorganization plans commonly call for the cancellation of the existing common stock, with holders receiving nothing. Nada. (Translation: your stock becomes toilet paper.) Lawsuits are a difficult and costly way to try to recover losses.
Mistake # 3. Pet Rocks
It’s very tempting to buy stock after shareholders have earned seven thousand times their investment, or after the product sells four gazillion copies, but that is called chasing money. There were people, lots of them, who bought AOL Time Warner and Priceline at peak share prices in 2000, thinking that heavenly heights could last forever. Too bad losing weight isn’t as easy as losing money.
Mistake # 4. Hot Tips
Hot tips are often merely "Pump and Dump" schemes—a colorful name for the scheme in which scam artists send out tens of millions of e-mails or load the stock market bulletin boards with messages like:
"This one is going to SKYROCKET."
"50 cents today, $3.50 by next Tuesday."
"Hot stock on the rise. Must act now. Is trading at 29 cents, and is sure to trade above $2.00 by the end of tomorrow."
They pump up the stock, so they can quickly dump when enough suckers fall for the charade and buy.
The price goes up—but not because something great is fundamentally happening with the company. It goes up just because the promoters (who are probably paid) have duped enough people into buying. Then the insiders sell (quickly), which makes the price fall flatter than a stone. People who fall for pump and dump schemes typically lose their investment. Even if the company stays in business, it might trade at the same rock bottom price for years.
These kinds of hot tip scams abound with companies that are trading "off the boards," which are also called penny stocks. Any stock trading under $1.00 is likely to be trading off the boards (which means there’s less compliance with GAAP accounting and SEC securities standards). Never respond to a direct mail or e-mail campaign to buy a stock "NOW, before it explodes." No credible company would send a notice like that. The SEC has laws against solicitation of investments.
Assume hot tips are swampland in Florida unless proven otherwise by a gazillion independent, well-respected sources. Assume anyone who tells you that they have a "sure shot" that’s going to double, is lying, self-interested, or stupid.
Mistake # 5. Sure Shots
If someone promises to double your money in a set period of time, assume that you’re dealing with a novice or a scam artist, especially if they want you to write a check before doing any due diligence. If you’re dealing with someone who doesn’t acknowledge the risk, they are lying or very naïve. Beware anytime someone wants you to hand over money before you have a chance to read or research anything.
Mistake # 6. Buying on Headlines
Headlines are written by editors to catch your eye. If you don’t read the fine print, you could be missing the most important information. Before United Airlines declared bankruptcy, investors gobbled up UAL shares on the headline that United had received $1 billion in promised concessions from its unions. The investors assumed that this was great news and that the labor concessions were all that United needed to soar the skies once again and be profitable (with the help of some federal loans). A key consideration was hidden on the inside pages of the article, however: that the Federal Loan Guarantee required $1.5 billion in union labor concessions. In fact, receiving only $1 billion in concessions – when the loan was going to fall through unless $1.5 billion was delivered -- was very bad news, not the good news that the headline trumpeted.
The Loan Guarantee application was rejected, and United Airlines was forced into Chapter 11 only a few weeks after that headline appeared in what many people consider the country’s most reliable news source, the New York Times. The headlines of less respected news sources can be even further from the complete story. The New York Times had actually printed the complete story, but too many didn’t take time to read it.
Mistake # 7. Press Releases
Press releases are written by professional writers, who are employed by the company they are writing about. And press releases are not held to the same standards as the official corporate earnings statements that public companies must make with the Securities Exchange Commission. A company can talk about an increase in revenue without ever mentioning that increased revenues don’t mean the company is profitable or that, due to cash constraints, the company’s fiscal health is on the ropes. If you read anything that is from PRNewsWire or BusinessWire—services that distribute press releases written by corporate PR people—ask yourself, "What aren’t they telling me?" Press releases can have valuable data and information, but they are designed to give you a snapshot of something newsworthy, not to draw out the full picture.
Mistake # 8. Relying too heavily upon the advice of your broker
If your broker has handled your account beautifully over a period of time, don’t bother to read this Mistake; you’re lucky to have a partner who cares about your future and has the knowledge and expertise to get you there. Many investors don’t understand that most brokers are salesmen first, especially those with fewer years in the trade, and place too much faith in a broker’s knowledge, morals, and information. You wouldn’t marry a stranger, so don’t hand your financial life over to one either! (Read the article on Selecting a Broker for tips on how to find the perfect partner.) Find the article under the Investor Edu link on the home page at NataliePace.com.
Mistake # 9. Placing all your chips on one sector
Diversify! Even with blue-chip stocks and prime real estate, you risk losing all of your money. Enron did go bankrupt, just one year after it was added to Forbes Platinum 400 List, for revenue in excess of $100 billion. A freak fire destroyed a handful of homes in the prized Malibu Colony in California in 2007. When you have your assets diversified across different investment classes – from real estate, to stocks, to bonds, to money markets, to Treasury Bills, etc. – you are protected against any one fluctuation or disaster. And in all instances, make sure that you keep enough cash on hand and enough income flowing in to meet your expenses.
Mistake # 10. Keeping too much stock in your employer’s company
Rule of thumb: no more than 10 percent of stock in your own company.
There’s one exception to this rule: if you’re the owner of the company, you may need a dominating percentage of the stock for voting/power reasons. In the early days of Apple Computer, Steve Jobs was booted out of the company he had co-founded.
Mistake # 11. Handing your investments over to a loved one, relative or friend
I’ve spoken with women executives who have commanded billion dollar corporations, and others who have multi-million dollar salaries, who turned over their personal investment portfolios to a husband, in order to make him feel like "more manly." With men, it’s more likely to be the guy at the country club who convinces his poker partners to come in on a sure shot investment of his.
Money means different things to different people, but, chances are high, that whatever it means to you, it ranks pretty high on your personal Richter scale and can cause personal devastation in high dosages when tremors occur. If your friend, loved one or relative loses your money, it’s going to be hard to recover the relationship – no matter how much you like or love him/her. So, even though you might think it’s an act of love to entrust your future to someone, it’s really more like an act of annihilation. Somewhere down the road, the odds are high that person will make a bad decision (in your eyes), or there will be less money than you hoped for (if any at all), or there will be a falling out between the two of you, or simply the person wasn’t really qualified for that level of responsibility in the first place.
As Dr. Phil says – and yes, I’m quoting him – each partner in a relationship should have personal money that s/he can set on fire if s/he feels like it. Imagine how much more important it is for each partner in a relationship to control the life of her dreams and the financial means to get there. I’m not encouraging you to hide money, merely steer your own ship in this regard. Have some personal passions fueling your short time on this planet, and use your financial freedom plan to help you get there. Whether you are a mother hoping for a better home for your children, or a father preparing to send your kids to college or a bachelor building green skyscrapers or a nun building Habitat for Humanity homes, your desire for a better life is the motivation to have more money of your own to "play with."
Even if you hate investing, almost anyone can set up an auto-payment tax-free retirement account through an online discount brokerage in just a few minutes. Take, at least, that amount of time. The cyber broker, which is set up on Modern Portfolio theory, is a better strategy than having a loved one wing it with a self-penned, but poorly tested, plan.
Before you have your first child, it would be great to get a list of the top ten parental mistakes. Imagine how much easier it would be to know that the first time your child gets a scratch, you’ll mistake it for a gash and have to spend a thousand dollars on the ER. It’s really amazing how ridiculously easy common parenting mistakes are to the parent of four, who shakes her head knowingly at the rookie mom. The same is true of experienced investors. They know these tips like the back of their hand, and if you write it on your hand while you’re learning, chances are you’ll find more money sticking there, too.
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