How to Avoid the 7 Most Common Investor Mistakes And Build Steady ProfitsNo Matter What the Markets Do
By Steve McDonald, Director, Oxford Club VIP Trading Services
One of the most least understood truths of investing is this: Success in the game of investing depends more on not making investor mistakes than it does on picking big winners. Period.
Of course, finding a neglected small-cap stock and riding it to the stratosphere is exhilarating. And nothing compares to the pure satisfaction of the hunt. But, as anyone who's been around the financial markets for a long time will tell you, it just doesn't happen very often.
The real pros understand that success comes from sidestepping the traps-specifically, the mistakes that lure the unwary investor into unrecoverable disasters.
Day in and day out, these pros follow a disciplined approach. They're not swayed by talking heads and self-appointed market pundits who babble on about the next big thing. They're confident in their ability to stay out of trouble and ride through the rough spots as they wait for the next good opportunity.
This Investment U special report will help provide that same confidence by dispelling some of the myths that derail most investors at some point-but that can be easily avoided.
So let's jump right in and take a look at some of the top investor mistakes out there-what I call the "Seven Deadly Sins of Investing." These common misapprehensions will erode your profits and leach away your hard-earned capital. In addition, we'll show you a proven, time-tested approach to avoiding each and every one of them.
At Investment U and the Oxford Club, our only objective is to help you-and all of our members-prosper. You won't find any conflicts of interest here. We're not selling you stocks, bonds or other investments. Our only hope is that this special report will go a long way to ensure that your money continues to grow safely.
Investor Mistake #1: Following the "Saturday Morning Hero" Will Lead to the Promised Land of Investing
Is there anything more exciting than a great pass that wins the game in the last few minutes of Friday night's big football rivalry? "The Saturday Morning Hero" is the star of the week. Unfortunately, in another week that star is completely forgotten.
In the investment business it's pretty much the same game. Anyone remember Elaine Garzarelli? How about Michael Milkin? There was a time when a public sighting of either one of them would start a stampede. Not so anymore.
Sometimes, Money Managers Really Are Just Lucky-Once
Elaine Garzarelli was right about one thing, once: She happened to luck out and predict the 1987 crash. That was probably her last correct call. But she was hot for a while. She had her own radio and TV show, she was quoted by everyone, and as far as we can remember she was consistently wrong. She's one of those Saturday Morning Heroes. A lucky catch catapulted her into investing stardom. But it wouldn't last long.
Mr. Milkin, at one time (before he went to jail), was the "Bond God." Remember the RJR buyout, and just about every other buyout of the '80s? Mr. Milkin was behind most of that business. He created a whole new idea in investing: Junk bonds. And folks stood in line to buy them . . . until they began living up to their name.
After his bonds blew up, Milkin went from being a Saturday Morning Hero to Sunday Morning's Goat-and served some hard time as a result.
The bad news in all of this is that the average investor is usually the first in line to follow the Saturday Morning Hero.
We love heroes. And the biggest danger in hero worship is backing our star long after his time to shine has ended. When investing, it costs us money to follow a hero whose day has passed.
Most of us find it difficult to buy into a system and stay with it. We're always looking elsewhere trying to find the latest and the greatest. This is the beginning of what have proven to be very costly moves for a lot of investors. By the time you discover it's the latest and greatest, it turns out to be just another Saturday Morning Hero.
As you move from service to service, or fund to fund, you begin to develop "Investing Scars." Each time you realize the most recent service isn't the answer to all your dreams, you blame the service or the manager.
The fact is you were probably chasing past performance and got in at the worst possible time. We have all done this. It has a cumulative affect and, at some point, the scarred individual just quits.
The answer to this dilemma is simple, but there may be no tougher thing to do than to choose an investment or trading service and stick with it through a tough period in the market.
The best approach is to give your investments time to work. This takes practice and discipline. Most investors never have these qualities, but you can develop them with the help of VIP Trading Services. With these powerful tools, you can make time serve you and your profits.
Investor Mistake #2: A Few Weeks Is Long Enough to Wait for Huge Profits
Mark Twain once told a fabulous story about a 17-year-old kid who leaves home and returns eight years later-only to be stunned by how much smarter his father has become!
If you're under the age of 25, you might not get the message above. For the rest of us it's a funny reminder of how the passage of time affects everything in our lives-including our investment choices.
In investing, one principle always rings true: Time is the single most important element of investing. And for that reason, mismanaging time can have the most devastating effect on your money.
Expand Your Time Horizons
Ridiculous as it may sound, the average investor has a time horizon of between two and six weeks. This means that if an investment doesn't start to go the way the investor thinks it should-within about a month-the investor gets antsy and usually gets out. This is the most obvious and most common misuse of time.
Of course, there's an important difference here between trading and investing. Traders exchange a much higher degree of risk for this much shorter time frame.
In fact, every measure of investing is tied to some element of time. Running averages, charting, entry and exit points and so on. Many experienced brokers say a three-year time frame is a good perspective to use when making a decision to buy a stock.
At the very minimum, you should look at the 52-week trading range. For mutual funds the recommended minimum holding time is three to five years.
Investor Mistake #3: You Should Only Buy Soaring Stocks, Using "Insider Knowledge"
"I bought this supposedly hot stock and it dipped right after I got in!"
If there were ever a universal investor complaint, that's it. So what's happening here?
To begin, we need to think about why and when we invest in a stock.
When: If you're like most people, you wait for the price of a stock to increase to such a point that you are convinced it's a good investment.
Why: Let's start with an example. You have a friend, whose brother works for a guy . . . who owns a company that does business with a company . . . whose sales rep said the company is making money hand over fist. Based on this "direct" feed to the inside, we take our hard-earned money and buy stock in this company.
But by the time we hear about it, the price has usually run up far beyond a reasonable buy range, and in effect we've just paid a commission to give our money to someone else.
Mingled together, a wrong "why" and a wrong "when" can have some pretty strange results. What often happens next is right out of a bad joke. An otherwise normal, rational person becomes glued to MSNBC and the quote section of AOL. He spends every free moment watching this dog to see when-not if, but when-it's going to "take off."
As the obsession grows, the investor spends more and more time watching the stock price, almost as if that alone will make the price go up. He may even call the person who gave him the tip-and almost always will call the broker who placed the order for him.
The investor believes the broker should have known better, the friend is an idiot, and he or she is really upset about the situation. This is "market timing" in the worst sense, and it can only lead to losing money.
Other investor mistakes sabotage us, too, such as:
Overcoming Your Fear of the Investment Unknown
In addition to the aura of excitement and wealth surrounding the market, deep down, many folks are afraid of it. It's something few of us know much about. As a way of overcoming our fear of the investing unknown, we watch and monitor until we are convinced that investing works. We watch stocks go up in value until our fear of the market has been momentarily eased, and then we jump in headfirst.
The result is always the same. We pay too much for the stock, since we watched it go up, and it immediately starts to sell off to profit takers, or we get into something that never does anything.
Be Emotionless: The Key to Profitable Investing
When to buy and when to sell are only two of the tough questions you must be able to answer if you are going to invest successfully. Doing both without allowing fear or any other emotion to get in the way is what separates the pros from the rookies. Why do we pay too much for stocks? It's because our fear keeps us from buying when it's smart to do so.
Investor Mistake # 4: Wall Street's Wizards Will Hit Home Runs for You
Remember when Chicago Cubs slugger Sammy Sosa was suspended for using a corked bat?
Why did he do it? Obviously because he could swing a corked bat faster, thus sending the ball farther. Plus, he thought he could get away with it. Fans pay to see Sosa hit homeruns. That's certainly what we expect him to do, too. Sosa felt the pressure.
Wall Street's high-powered marketing mavens are using their own versions of corked bats to peddle high-flying tech stocks set to "go to the moon." Or swamp-dwelling "value dogs" that are supposedly set for a big move. All we have to do is get out our wallets.
And too many investors do it over and over again.
That's exactly what the aggressive brokers on Wall Street are counting on when they try to sell us their get-rich-quick stock picks (make 10,532% profits overnight!), or currency plays that will "change our lives forever."
Virtuoso Button Pushers
You see, those brokers are smart. They know what pushes our emotional buttons. But we don't have to invest emotionally in things that ultimately might harm our portfolios. Instead, we can insulate ourselves from the Wall Street sales machine by following a sound, non-emotional investment strategy.
How does Wall Street use your unrealistic expectations to fleece you? It simply offers mutual funds with hyped-up returns. Annuities that claim outrageous guaranteed returns. IPOs for tech stocks with wild, impossible expectations. Or biotech stocks with incomprehensible science behind them.
It isn't hard to figure out what the average investor expects. He wants guaranteed investments that will return 400 to 500% per year. This is the reality of the small or novice investor. They usually won't admit this, but it's very close to the truth.
Wall Street, for all its failings, is not staffed with stupid people. In fact, they are as sharp as people get. What they do best is figure out ways to get your money into their pockets.
The Danger of Wanting to Believe
When the media finally started publishing information about how investors were lied to and cheated during the big run-up in the market in the 1990s, there were a lot of angry "reformers" on the warpath.
The fact is, not one of the scams, not one phony research report, not one inflated IPO or dot.com could have ever seen the light of day if there weren't investors who wanted to believe in them.
When the next Wall Street scandal hits the papers-and it will-think for a moment about how realistic the expectations were that allowed it to come to life.
Hit for Singles and Doubles
Investing is a game of averages, not homeruns. Success depends on hard work and a disciplined investment strategy that includes:
Once you have all of this in place, you'll never again lose money due to unrealistic expectations.
Investor Mistake # 5: There's Always Another Tech Run-Up Just Around the Corner
At this writing, the market has made a big move, shaking off some of the bear doldrums of the recent past.
Interestingly, the tech sector stocks-the same ones that lost investors so much money the last time around-are back in the saddle with big gains. So why are people jumping back into the same stocks that wiped them out just a few years ago? And an even better question is this: Should you follow them in or develop the discipline to tell a solid investment from solid waste? Here's your answer:
No Earnings, No Products, No Dice
These tech companies, for the most part, have no earnings, inexperienced management (or just bad management) and a proven record of getting in debt way over their heads. Despite all this, despite their record of turning wealth into thin air, investors are standing in line to own them . . . again!
When the telecom, Internet, chip manufacturers and computer stocks were in the midst of their crazy rally of the late 1990s, most experienced investors knew enough not to get overloaded in them. It didn't take an Alan Greenspan to know that we had to have a really bad crash if the market was running up so high, so quickly. It also doesn't take a genius to know that companies with no product or earnings, and with kids running the show, don't last long.
Before the latest tech run-up, you would have been hard pressed to find anybody in the world who would have ventured into the tech sector. The wounds from the crash were still very real.
But apparently time has healed many of them . . . or a lot of investors have forgotten how they got hurt before. If you're in this group, here's a reminder:
Entire fortunes were wiped out because investors were led to believe that these fast-growing companies--the tech sector in particular-had no top. These babies would go to the sky and then some. It was the digital-information age, and we were leading the world to limitless new heights.
It's Déjà Vu All Over Again
But things are better now, right? Well, not exactly. After several years of corporate scandals, indictments, sweeping changes in the SEC and tougher enforcement of the existing laws to protect investors, we're actually right back where we were when tech stocks looked like the deal of the century. The picture is already forming, and investors are again being set up like bowling pins, and knocked down again.
Apparently, too many of us learned nothing over these mistakes. We still want to believe that we can make a quick buck in the market by taking crazy risks with our money. So that begs the $64,000 question: Will it happen again? Could we get ourselves in the same pickle we had been in for the last three years of the killer bear market? As a matter of fact, this looming disaster is entirely unavoidable.
Investor Mistake # 6: If You Listen to Enough Televised Investing Reports, You'll Learn Something Profitable
About anyone who knows a stock from a bond can enjoy the televised financial reports that run daily in the media. Problem is, they provide just enough information to make them dangerous to your wealth.
Most commentators have no professional experience in the financial markets. In addition, they essentially read scripts written by people who may have no, or little, professional experience in investing.
The worst part is that most of what you hear in the media about the markets is not wrong-it's just incomplete. At best, you're getting less than 1/100 of the information you need to make a decision. And this creates the most dangerous situation of all: a false sense of knowledge.
The average person watches this slurry of earnings information, opinions, biased positions from the featured talking heads, gold prices, crude oil prices, the Greenspan watch, the yen, the euro, you name it. And some actually try to manage their money with the crumbs of information they glean from these shows.
Bottom line, investing is serious business. It is not about personalities in expensive suits, styled hair or even the pretty young women reading scripts in front of pictures of the CBOT. It is about getting solid, actionable information from reliable sources and putting that information to use.
Investor Mistake #7: Watching the Markets and Predicting Them Is the Key to High Returns
Smart investors are more interested in making money, not in what the markets are doing. Of course, if you invest in the indexes (DJIA, Nasdaq, etc.) then you need to follow them. However, if you are invested in companies, look at the companies, not the indexes.
You can make money by investing in stocks that go up in price when the market is up, when the market is down, or when the market is flat. In this light, the answer to "What's the market going to do?" couldn't be less important when it comes to your portfolio.
Understandably, we have been led to believe, by television for the most part, that the DJIA is the end-all, be-all of the stock market. And in the last few years the Nasdaq's performance was considered all-important.
The fact is our fascination with the major indexes is one of the reasons many people get into the market too late. They think, or expect, the market index to be an indicator of when it's a safe bet to invest. This is a common investing mistake. They're wrong.
The Reality and Myth of "the Run"
Consider the Nasdaq during the so-called bull market of the late '90s. The lowly Nasdaq ran from a meager 1,200 to 5,000 in about four years. That's about 400%. The average Joe turned on his TV at night and heard this and assumed people who invested in the stocks on the Nasdaq were making a lot of money. What Joe didn't (and still doesn't) know is that 97% of the increase in the Nasdaq was the result of three stocks.
The Nasdaq has 100 stocks and uses a market-weighted system to arrive at its average value. What's "market-weighted" mean? It means that if a stock represents a greater percentage of the total value of all of the outstanding shares on the Nasdaq, it will have a greater impact on the movement of the entire index. In other words, the larger a company's "float" (number of shares on the market) and the higher its stock price, the more it drives the average.
So, in the mid-1990s there were three major Nasdaq stocks: Intel, Microsoft and Dell. They had a huge number of outstanding shares. And their shares were skyrocketing, for good reasons: sales and profits. The result is that they accounted for 97% of the yearly growth of the index. The average growth of the remaining stocks on the Nasdaq for the late '90s was 3% per year.
How about the Dow Jones? The DJIA is an average of 30 stocks. It was originally designed to be an indicator of the results of industrial production. In case you haven't noticed, we are not into industrial output anymore. Still, everyday, all day, it's what most people think of when they think of the market.
There are about 14,000 stocks listed on the NYSE and Nasdaq. Ever wonder what the other 12,970 are doing?
There is a good use for the indexes. But they are used in conjunction with the other thousands of indexes, trend lines, fundamental data, technical data, etc. They are never the only indicators to be considered when you're buying or selling stocks.
During the three years of the bear market, The Oxford Club VIP Trading Services managed to eke out small gains or break even. We would have loved to have made money every year. But considering the markets were down as much as 20% in 2002, breaking even looked pretty good. Unfortunately, too many members wouldn't take advantage of the recommendations they were paying for that could have worked for them. Why? Because the Dow and Nasdaq were down and that scared them off.
When Mainstream Media Calls the Shots . . . Run the Other Way, Fast
Here's how you do it. Wait until the TV talking heads are saying we are in a recession; the market is going to drop like a rock, and they are predicting doom and gloom. At that point, stocks will be ready to go through the roof. When TV figures out that stocks are in trouble, it's time to buy.
So, what's the market going to do? It's going to go up. Long term the market goes up. What you want to know is, "Will it go up within a certain time period after I put my money in?" Yes, but only if you stick with the tried and true methods, give it time to work, and use reliable information sources. By doing these simple things, you are doing everything you can to maximize your chances.
Here's our short list of "Don'ts" when you're trading for short-term profits.
If you want to make money, avoid:
This article was originally published as an Oxford Club Investors' Report. The Oxford Club, founded in 1984, has become the largest financial organization of its kind with over 65,000 members in over 110 countries. The Club helps investors around the world create a financial legacy for their families that is shielded from excessive taxation, seizure, fraud, and inflation. The Club supports limited government, free markets, and individual liberty. As part of its educational arm, the Oxford Club started InvestmentU over 6 years ago. For more information on the Oxford Club, visit: http://www.oxfordclub.com.
Copyright 2004, The Oxford Club, LLC, 105 W. Monument Street, Baltimore, MD 21201. Phone: 410.223.2643. All rights reserved. No part of this report may be reproduced or placed on any electronic medium without written permission from the publisher. Information contained herein is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed.