While modern-day investing can't be considered easy, it's not
necessarily difficult either. The secret to success is usually just
avoiding the small mistakes that end up costing big
With this in mind, here are the five most common pitfalls
investors should make a point of avoiding no matter how tempting
the alternative looks...
1. "Conceptual" investing
Investors love great stories. After all, it's fun to be able to say
you own the hippest dot-com stock, or you're invested in the
biotech stock that's working on a cutting-edge treatment for
cancer. But there's a problem with focusing on a general theme and
ignoring everything else. Eventually, bills have to be paid. Unless
the investment idea actually bears a decent amount of fruit
compared to what the stock costs, then what's the point?
Conceptual investing ran rampant in the dot-com era in the late
1990s and early 2000s, and ultimately crushed many
Take eToys.com for instance. The toy-selling website launched in
1997 and was all the rage, following in the same footsteps as
Amazon.com (Nasdaq: AMZN)
, and competing with Toys R Us (and the Toys R Us website). The
fact that the website was focused on onemarket was a big hit with
investors who never asked why the company's losses were growing
alongside the top line. By 2001, however -- and thanks to $247
million in accumulated debt -- the company was forced into
bankruptcy, having never actually made a dent in Amazon's
2. Not selling
Warren Buffett frequently says his favoriteholding period is
"forever," meaning he never buys a stock he thinks he might have a
reason to sell at some point in the future. It's his quaint way of
suggesting investors think long and hard before becoming a
stakeholder in any company. The problem is, he may say one thing,
but he does another.
Buffett does sell his holdings, mostly when the position's
maximum value has been priced in, as was the case of his holding in
Intel (Nasdaq: INTC)
. Though the Oracle of Omaha only stepped into his position in late
2011 at an average price of less than $22 per share, he sold his
stake in May of last year at $27.25 a share. The exit locked in a
short-term gain of 24%, which was a brilliant time to take profits,
in retrospect. The stock currently trades at roughly $21 a
The quick lesson in this story is: If a stock can be priced low
enough to make it a "buy," then by the same line of reasoning, it
can be priced richly enough to make it a "sell."
3. Lack of consistent approach/chasing hot trends
Remember the old cliche, "Even a stopped clock is right twice a
day?" It's a bit of a back-handed compliment, omitting the obvious
fact that a stopped clock is still wrong the other 23 hours and 58
minutes a day. Yet, at least by doing nothing, that clock is still
occasionally correct. But if the clock's owner was randomly
swinging the hour-hand and minute-hand around at various times of
the day, then it would probably never be right. Traders who jump
from one approach to another at the drop of a hat are also apt to
miss out on ever being right for reasons other than pure
4. Trading binary events
It's unfortunate that many investors' first foray into the market
is with a trade that's effectively a coin toss. If the news is
good, then the stock might soar and the trader reaps a big reward.
If the news is bad, then the trader is leftholding the bag and can
lose a lot of money in a matter of seconds.
It's called a binary trading event, or a piece of impending news
that can only have one of two possible outcomes -- either a
verybullish one or a verybearish one -- no in-between. It's also an
approach investing heroes such as Buffett, Benjamin Graham and
Peter Lynch wouldn't use in a million years, simply because there's
too much risk and no way ofhedging it. These market veterans pick
stocks that give themmultiple ways to win in multiple timeframes.
With a binary event, there's only one way to win -- once.
The most common binary event trades come from the world of
biotech, and usually surround a drug's approval (or lack thereof).
Guessing wrongfully can be far more painful than it's worth though.
As an example,shares of
InterMune (Nasdaq: ITMN)
plunged 80% when the Food and Drug Administration rejected the
company's highly-touted lung disease drug Esbriet.
This kind of risk is rarely worth it.
5. Underestimating the power of income and dividends
Growth stocks and big gains are what investing dreams are made of,
but these dreams don't always pan out nearly as often or nearly as
well as initially hoped. The fact of the matter is, income and
dividends may not seem sexy, but a full 40% of investors' long-term
gains are the result of dividends rather thancapital appreciation .
Throw in the fact that dividends are consistent while
priceappreciation can be erratic, and some investors might start to
wonder why they bother with growth stocks at all. The best way to
build your portfolio for long-term growth is with
Retirement Savings Stocks
, which you can learn
more about here
Action to Take -->
Avoiding all five pitfalls just seems like a matter of applying
common sense when talking hypothetically, but they're not as easy
to recognize when it comes time to make decisions about how real
dollars should be allocated, especially when it comes to your
retirement portfolio. Investors who can see when they're about to
fall into one of these five traps, however, stand to outperform the
majority of their investing peers.You should always look for safe
income, that's why
Retirement Savings Stocks
are always a great addition to any portfolio.
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