Even history's most successful investors have huge mistakes to their names. If you're in the market long enough, you're going to rack up some losses in addition to the treasured successes in your win column.
The good news is that learning from your mistakes, and the mistakes of others, can dramatically improve your performance. With that in mind, we put together a panel of Motley Fool contributors and asked each to highlight a misstep that cost them some big dough. Read on to see where things went wrong and how you can avoid these cash-draining pitfalls.
Pouring more money into losers
Keith Noonan: The old "buy low, sell high" strategy makes plenty of sense, even if it greatly simplifies the process involved. Investors aim to buy stocks at prices that are lower than they will be in the future, and so it naturally makes sense to look for stocks that trade below recent highs. After all, who wants to buy at the peak?
If you also take to investing genius Peter Lynch's maxim that the best stock to buy is one you already own, then it probably makes sense to look for beaten-down stocks in your portfolio that could be due for a big rebound and sustained rally. I'm a big fan of Lynch, and this particular bit of investing advice in particular, but adding to positions in underperforming stocks doesn't always work out.
Sometimes winners keep winning, and losers keep losing. That's a lesson I've learned the hard way after pouring more money into beaten-down stocks in my portfolio. Some of these losers went on to post even bigger losses after hitting prices I had thought looked cheap, while others simply lagged far behind other portfolio components that were backed by superior businesses. My portfolio performance would be significantly better if I would have stopped backing repeated losers at earlier dates.
Buying stocks on a pullback can be a great way to boost your returns over the long term, but it's still necessary to be judicious about which ones you're buying. Dumping money into companies that routinely underperform just because their stock looks cheap can often be a path to widening losses, and it's a temptation I'll be more wary about going forward.
Selling too soon
Daniel Foelber: Name the stock and I've probably sold it too soon. Tesla, Moderna, Target, Disney, and Nvidia are five examples from completely different sectors that I sold before the real run-ups happened. Motley Fool founder David Gardner always says to "let your winner run. High." And I think it's great advice.
There's an inherent temptation to double down on a stock that goes down to get a good deal. Or sell a stock when it rises to avoid looking like a fool if it falls. But stocks aren't like cars, houses, or other assets. A company's true value is much more abstract and evolves in ways that can exceed our wildest imaginations. The best thing an investor can do is let time work in their favor by selecting great companies and owning them over the long term.
Peter Lynch, one of my favorite investors of all time, often spoke about how just a handful of big winners can cancel out several losers. You only have to be right "60% of the time," according to Lynch. But a big part of that is letting your winners run.
The difficulty comes when a company's stock price rises to the point where it looks expensive based on past results. But the reality is that companies with a bright future and great management tend to justify expensive valuations over time through growth. A great example that I think everyone can relate to is Amazon (AMZN -1.40%). It's been a popular and rather obvious stock to own for years. Yet many people (including me) have trouble pulling the trigger and buying it because it looks expensive. Many of the market's best performers are hiding in plain sight. Patience, more so than skillful stock picking, can be the elusive virtue that separates good investors from great ones.
Yes, those nickels and dimes add up
James Brumley: I've been lucky enough in my life to not always have time to think about replacing older positions with newer ones. As such, I've got a handful of investments I've been inadvertently holding for years that have done extremely well for me. Alphabet comes to mind. I don't even remember when I bought it, but I'm thrilled I've been too distracted to sell it.
As I look back at my relative (percentage) gains on a few of my holdings, though, I realize I would have been so much better off if I had just ponied up a little more money at the time and put it to work in the market.
This is of course a universal life lesson that's evolved into an outright cliche, and a somewhat misleading one at that. The younger we are, the less income we're likely to earn. On the other hand, I'd be kidding myself if I said I didn't waste a lot of money on the silliest of things at the time, with little of value to show for it today.
If you know this is you yet you're still struggling to save rather than spend, here are some numbers that might jolt you into making a change: If you're starting out at the age of 25 with nothing but want to retire with $1 million at the age of 65, socking away a mere $3,000 per year will get you there. Wait until you're 40, and that annual investment requirement jumps to about $12,000. At 55, forget about it.
The point is, saving even just a little more when you're younger makes a huge difference down the road.