3 Investing Mistakes I've Made, and How You Can Avoid Them

No one is a perfect investor, but everyone aspires to be the best. Over the past 13 years that I've been investing, trading, and studying the stock market, I've made some brilliant, timely, and downright lucky calls. On the flip side, I've also made some decisions that would make Netflix CEO Reed Hastings look like a genius when it's apparent he belongs in the corner with a dunce cap on his head.

What I intend to do today is look back at some of those poor decisions I've made in the past and share them with the community so that we can collectively learn from my mistakes. Although I'm sure I've committed considerably more errors than this, I've highlighted what I consider to be the three most common investing mistakes I've made throughout the years and suggested ways you can change your investing approach to avoid making the same errors I did.

Chasing "less-bad" results
This is probably the most common investing mistake I'm guilty of committing. One of the toughest things to do is to decipher the difference between a genuine value stock and a company whose business is literally deteriorating before your eyes. I've persistently stuck by the assumption that Research In Motion (Nasdaq: RIMM  ) is a buy and that its enterprise business would be enough to keep the business solidly profitable. Since making this call, I've been proven wrong over and over. RIM now trades more than 60% below where it was when I initially made the recommendation to buy. Chasing results that are simply "less bad than before" has gotten me in trouble more often than not.

What you can do to avoid my mistake: There's a clear difference between an anomaly and a trend. RIM's smartphone market-share losses and AOL's revenue decline are most definitely trends. Cisco Systems (Nasdaq: CSCO  ) , on the other hand, may have hit a rough patch in its growth, but it doesn't constitute a trend in any way since it remains a leader in the networking sector. Establishing early whether your investments are simply at a rough patch in their growth cycle or if their entire business models are at risk could mean the difference between healthy gains and steep losses.

Know when to say when
I, like most investors, definitely have a problem with not wanting to admit when I'm wrong -- especially to myself. We all envision ourselves as perfect investors, incapable of choosing poor stocks, but occasionally we let our egos get in the way of our better judgment.

Case in point: Prior to the near-meltdown of the U.S. banking system in 2007, I thought E*TRADE Financial (Nasdaq: ETFC  ) was the bee's knees. That a company that had been growing like wildfire could get caught up in the same mortgage meltdown as Citigroup (NYSE: C  ) and Bank of America (NYSE: BAC  ) just didn't seem plausible to me.

So when the stock fell below my initial purchase price, I did the only logical thing I could do at the time -- I bought more. And you know what E*TRADE did after that? It dropped some more. Being the stubborn person I am, I simply assumed that I couldn't be wrong and that it was only a matter time before E*TRADE debunked this mortgage mess. In the end, E*TRADE found itself lucky to have even survived -- and my investment was practically worthless.

What you can do to avoid my mistake: Checking your ego at the door is a crucial part of investing. It's a fact that you're going to, at some point, be wrong. Successful investors have the ability to cut underperforming stocks from their portfolios earlier so they don't become a drag on the winners. Investing isn't an accuracy game -- it's about hitting the jackpot on a few long-term success stories.

Chasing a hot sector
I know I've felt the allure of following the herd into a popular sector only to be squashed when the bubble eventually burst. This pretty much sums up the Internet bubble and the housing crisis in a nutshell. Still, nearly 10 years ago, this didn't stop me from buying into what everyone considered to be the next big alternative energy craze.

Specifically, I thought Plug Power (Nasdaq: PLUG  ) , a manufacturer of fuel cells, was going to be the greatest thing since sliced bread. Oh, how wrong I was! Plug Power instead turned out to be one of my worst investments in percentage terms and a decade later is still losing money.

What you can do to avoid my mistake: Making sure your investments have substance behind their promises makes all the difference. From fuel cell manufacturers to stem cell research companies, all promised great things 10 years ago, but many have failed to deliver. Not only is the prospect of turning a profit important, but the projected longevity of a company's product is important. Taking all of these factors into account should protect you from buying into the next bubble.

Foolish roundup
There's no magic formula to becoming the perfect investor, but as long as we're able to learn from our mistakes we definitely become better investors. If you take anything from my experiences, it should be that the stock market is a humbling beast. It can make a fool of even the most confident investor, or CEO, for that matter. Putting aside your emotions and your ego and objectively focusing on the long-term prospects of a company should give you the advantages you need to be a successful investor.

Above I've shared some of my most common gaffes; what are some of yours? Share them in the comments section below so we can all learn from our mistakes and become better investors.

In addition, I invite you to download our latest free report, "5 Stocks The Motley Fool Owns --- And You Should Too." This report only reinforces some of the suggestions I made above, and best of all, it's free!

Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. He often finds himself to be the butt of many jokes. You can follow him on CAPS under the screen name TMFUltraLong , track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.

The Motley Fool owns shares of Citigroup, Bank of America, and Cisco Systems, and has also created a bull call spread position on Cisco Systems. Motley Fool newsletter services have recommended buying shares of Netflix and Cisco Systems. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's always willing to walk the walk.


Read/Post Comments (6) | Recommend This Article (10)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 04, 2011, at 12:01 PM, Triller wrote:

    Looks like you got sacked by PLUG over a decade ago, and still sour about it, but guess what, the cycle is coming back around and PLUG is about to be profitable for the first time. The prelude to the future was a decade ago, but the future is here now. In 6 months Fuel Cells may be too far out of reach. When PLUG was over 100 bucks a share, scientific investors realized the potential, space shuttle potential. Now fuel cells are picking up steam and your negative bias may just eliminate you from the new age investment of the now. 2 bucks a share for a fuel cell play that traded over 100 bucks when it emerged as a new technology? Now it's here to stay. I'm loading up, and so are a few thousand other investors. BLDP too! FCEL for a buck maybe good in a year or so, but it won't be a buck a share. How much would you pay for clean air and water? Move to the desert. You'll find out what's important.....

  • Report this Comment On November 04, 2011, at 12:10 PM, TrackUltraLong wrote:

    Triller,

    I wouldn't say that I have a negative bias toward PLUG, so much as I can see now that nothing has really improved with the company in the past 10 years. It's supposed to be the "next big thing," but those promises haven't translated into results up until this point in time.

    TMFUltraLong

  • Report this Comment On November 04, 2011, at 2:31 PM, VolkOseba wrote:

    Here's one: if you don't have a lot of money to spread around, don't spread it too thin. People say "don't put all your eggs in one basket," but when commission is involved, putting a half an egg in each basket isn't a bright idea either.

  • Report this Comment On November 04, 2011, at 8:39 PM, jaketen2001 wrote:

    TMFUltra,

    Plug is set to increase units shipped 400% next year. Wether that parlays in to profits, who knows.

  • Report this Comment On November 04, 2011, at 10:01 PM, dokworks wrote:

    So, you were bullish on RIMM 6 months ago and now you changed your mind? Where is your conviction?

  • Report this Comment On November 06, 2011, at 8:09 PM, DividendDude wrote:

    Thanks for sharing these experiences with us. Which brings me to my greatest investment mistake - learning ONLY from my own mistakes. Once I found out how easy it was to learn from OTHER'S mistakes, I significantly decreased my overall investment risks. My foolish advice - stay in contact with other investors and learn from their mistakes.

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