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5 Common Mistakes Investors Should Avoid
11/9/2012 9:30:00 AM
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 bucks.
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
Conceptual investing ran rampant in the dot-com era in the late 1990s and early 2000s, and ultimately crushed many investors.
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 sales.
2. Not selling
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 share.
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
4. Trading binary events
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
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.