Those who are new to investing are just as smart as those who
have been around for a long time. The main difference lies not in
intelligence, but wisdom -- the wisdom that comes from making
mistakes and learning from them.
From Warren Buffett to George Soros, even the savviest pros will
tell you their early years were characterized by dubious choices.
Their greatest strength now is the ability to always make the wiser
Here are seven pitfalls that even the best investors run into.
Avoid them and you'll come out far ahead in the end.
1. Chasing performance
When stock prices are surging, it's tempting to jump in and
in the hope that the strong market gains will continue. Conversely,
if everyone else is selling, then it doesn'tmean you should
mindlessly follow suit. Instead, you should be buying at a steady
pace in good markets and bad, ignoring what the herd is doing.
Chances are, you'll be buying high and selling low. As I noted a
year ago, investors have tended to turn very
right before big market rallies.
Since we can't predict where the markets will head, investment
advisors suggest dollar-cost averaging, which means buying a steady
amount on a consistent basis, whether markets are rising or
2. Following hot tips
That great investment idea you just heard about has probably been
circulating on traders' desks for a number of weeks and is already
stale. Instead, do your own homework and make sure you really
understand a stock before making a decision to buy.
Sure, a few hot tips may take off, but the vast majority will not.
My portfolio never grew in value until the day I stopped buying
other people's "can't miss" stocks and started researching my own.
3. Not letting your winners ride
This one has been a hard one for me. I would always instinctively
sell a stock after it had risen by a healthy 20% or 30%, only to
discover a year or two later that the stock had gone on to rise
another 50% or 100%. So if a stock you own is making a steady
upward move, then it often pays to hang in there and let it
run its course. Only sell if you believe the stock price is now
fairly valued or
4. Investing in a flaky company
You buy a stock for a fixed set of reasons. Perhaps you're
expecting big things from a soon-to-be-released product. Or maybe
you anticipate management's new cost-cutting plan will unlock
profits. If those events fail to develop as planned and management
starts talking up a completely different plan, then it may be wise
to sell the stock and move on.
Companies that always offer up excuses for why plans didn't pan out
(and quickly come up with a new plan) tend to perpetually frustrate
investors and never really gain a following among big investors.
5. Buying when insiders are selling big blocks of
Insiders, like company executives and board members, often hold
lots of stock, so it's normal for them to sell from time to time.
But if several sell at once and in large volumes, then don't jump
in until you know why. As I've mentioned before, heavy
insider-selling can be a sign that the people who know the most
about the company are concerned the stock price may have already
run its course, or bad news may be coming.
6. Buying anIPO before its lock-up expiration
When a company files an
initial public offering (IPO)
, company insiders are required to obey a "lock-up agreement" that
prohibits them from selling their personal shares for six months.
After the agreement expires, insiders tend to flood the market with
their shares, resulting in a lower share price.
This trend is pretty predictable. Even the big-time investors who
bought into the
early will sell their shares a week or two before the "lock-up"
expiration so they don't get caught in the upcoming price drop.
If you really like a post-IPO stock such as
, and it has been four or five months since the IPO, then you're
best off waiting to buy the stock until after the lock-up
expiration, when the selling pressure has abated.
7. Not watching the company's peers
Investors tend to focus on a particular company without paying
enough attention to the broader industry or its peers. Often times,
a rival company can provide clues to changing market conditions
that will eventually affect your stock.
You don't have to be caught off guard when your company finally
announces it's dealing with a major industry change. If you follow
the company's peers, then you'll already know the change is coming,
and can buy or sell before the herd.
Action to Take -- >
One of the great facts about investing is that everything seems to
repeat itself. And over time these lessons become intuitive.
I've followed certain stocks through several
markets, through periods of economic expansion and economic
contraction, and have developed a very clear sense of when a stock
becomes a clear buy and when it become a clear sell. Pair these
tools I've mentioned above with the wisdom you'll accumulate, and
soon your performance will start to mirror the results of the
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.