We’ve all heard of Warren Buffett’s investment brilliance, but how many actually know that “The Oracle of Omaha” spent an extraordinary amount of time studying the companies in which he invested? Not to mention the years of patience he had waiting for some of them to pay off with above average returns.
In order to feel at least a part of the Buffett magic and not to make the most common mistakes that all novice investors (and often some more experienced ones) make, we have made for you an overview of them with the help of several relevant sources.
Not understanding what you are investing in
The aforementioned Buffett has warned on countless occasions that you shouldn’t invest in stocks of companies whose business models you don’t understand. According to Investopedia, building a diverse portfolio of exchange-traded funds (ETFs) or mutual funds is the best way to avoid this. Before investing in individual stocks, make sure you understand the companies represented by those equities.
You should never, ever follow the crowd since it frequently does not include research and instead replicates what other investors are doing. Many people learn about an investment only after it has done well. When the price of a stock doubles or triples, the mainstream media usually covers it as a hot take. Unfortunately, by the time the media becomes involved, the stock has generally achieved its top. At that moment, the investment is almost certainly overpriced.
Disregarding valuation
You may have studied widely and extensively and have a thorough grasp of a firm and its industry. You may have concluded that it is a fantastic business with tremendous long-term potential. That’s also terrific. But if a lot of other people have come to the same conclusion and bought a lot of the stock, sending its shares skyrocketing, you will be buying an overpriced stock that is more likely to fall back to its true value in the short term than to keep going up.
The Motley Fool says you should always analyze the quality as well as the pricing of any firm or stock you are considering for your portfolio. You may keep a list of fantastic stocks that you’d want to purchase if the price was right. Always try to acquire a stock for less than you believe it’s worth, preferably much less.
Watching the markets all the time
The markets are always changing, and attempting to keep up in real time might lead to you constantly monitoring or adjusting your investments when you’d be better off leaving them alone for the long term. According to the experts that CNBC consulted, viewing a dismal performance without context might lead to impulsive decisions, whilst viewing an excellent performance can encourage overconfidence. Investors should avoid tracking their performance (both good and negative) too regularly, according to financial advisors. While it’s simpler than ever to obtain real-time updates on your portfolio’s growth, it’s not always essential. They say that you should look at your investments every three months, which should be enough for most investors.
Lack of patience
Another common investment blunder is a lack of patience. The Balance says stocks may not produce the required returns immediately if you are investing for the long term.
If a company’s management team announces a new strategy, it may take months or years for that plan to be implemented. Too often, investors buy stocks and then expect the stocks to work in their best interests.
The Balance gives an example: between 2000 and 2021, the S&P 500 index, for example, delivered an average yearly return of 9.01%. This includes five years with negative returns, including the Great Recession of 2008, when the index fell by 36.5%.
Not making diversification
It’s a bad idea to have too many investments of the same type or to “place all your eggs in one basket.” They don’t add any real value to an investor’s portfolio and only make it look like it’s diversified, which is a bad thing.
Diversification is recommended. Invest in a variety of instruments. You can invest in equities, bonds, and real estate, as well as market capitalization (large-cap, mid-cap, and small-cap), strategies (growth, value, and passive), and sectors and industries (FMCG, pharma, and technology).According to Entrepreneur, diversification is key since not all assets perform well at the same time.
