How To Avoid Common Investment Mistakes

I spent over 30 years as an old-school stock picker. 

I saw a lot of weird shit — attempts at market manipulation, managements that lied to my face, and CEOs who despised their CFOs and vice versa.  I also watched markets change with the data arms race, quantitative investing and high frequency trading.

My advice for newbies? Learn how to get out of your own way. 

I used to love watching Kitchen Nightmares and The Dog Whisperer. Take Gordon Ramsay and Cesar Millan out of the equation. Ignore the fact that one show was about failing restaurants and the other was about neurotic dogs. Here’s what both shows reveal — the person responsible for the mess is always the owner, who also has no clue they’re to blame.

The owners refuse to admit they’re wrong. They set poor boundaries. They aren’t willing to try new things. They insist on doing what feeds their egos, not what the business or the dog needs. 

Investors are the same way. There’s a long list of psychological traps to avoid, and until you know what they are, you won’t be able to avoid them. Here’s but a small list:

Investors check their portfolios too often. They suffer from FOMO. They hate losing money more than making it. They churn their portfolios too much, racking up transaction costs. They round trip stocks. 

They can’t admit they’re wrong and sell their losers. They can’t take money off the table. They invest money that they can’t afford to lose. They use leverage. They listen to ignorant people. 

They ignore their common sense. They take the market personally. They don’t take taxes into account. Owning a stock becomes their identity. They waste time fighting internet holy wars.

Being a successful investor requires more psychology than math.

Photo credit: Rijkmuseum, CC0, via Wikimedia Commons