Roy H. Williams once said, "A smart man makes a mistake, learns from it, and never makes that mistake again. But a wise man finds a smart man and learns from him how to avoid the mistake altogether."
None of us can avoid all investing mistakes, but as the quotation above suggests, we might make fewer mistakes if we take some time to learn about and avoid common ones. Here are three investing blunders that can cost you a bundle.
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1. Not understanding what you're investing in
This is a classic beginner investing mistake and, sadly, one that even experienced investors make: not really understanding what you're investing in. This can happen when you read a short piece about a company that's very bullish on it and then buy some shares.
Maybe it was a company in the oil industry. If so, did you take time to find out whether it focused on upstream (exploring, extracting, and producing), midstream (transporting and storing), or downstream (refining and distributing) operations? Each of those activities has its own challenges and opportunities, and you'll want to understand the strengths and risks of any company you're considering investing in -- and have a good grasp of its competitive advantages, too.
It's also important to understand a company's business model -- which is exactly how it makes its money. You might think of Amazon.com as a dominant e-commerce company, but that's far from all it does. Among other things, it operates one of the largest cloud computing services -- Amazon Web Services (AWS), which generated 16% of revenue in its second quarter, up from 13% a year earlier.
Some industries, such as consumer products and retail, are easier to understand than industries like biotechnology and internet security. Be sure you understand what you're investing in.
2. Not considering valuation
Next up is valuation. You might have read broadly and deeply and have a solid understanding of a company and its industry. If so, terrific! You might have determined it's a wonderful business with amazing long-term potential. That's also terrific. But if many others have come to the same conclusion and piled into the stock, sending its shares soaring, you'll be buying an overvalued stock that might be more likely to fall closer to its intrinsic value in the near term than to continue soaring.
Always evaluate both the quality and the price of any company or stock you're considering for your portfolio. You might keep a list of great stocks you'd like to own -- at the right price. Always aim to buy a stock for less than you think it's worth -- ideally, a lot less.
3. Not being patient
Finally, understand that for best results, you'll want to be patient. Think of the stock market's great long-term performers, such as Apple and Costco, among many others. Sure, you might have invested in them years ago and then sold after a few months or years, netting a respectable profit -- perhaps, say, 50% or even 200%. But if you'd held on for many years or even decades, you might have reaped eye-popping profits. Returns of 1,000%, 10,000%, 20,000%, or more are possible for long-term investors.
Never hold blindly, though. Buy with the aim to hang on for many years, but keep up with your holdings' progress and news. If their growth potential is no longer compelling at any point, consider selling.
And remember that great stocks don't appreciate in a straight line -- the line will always be jagged, with ups and downs. Prepare to wait out downturns as long as you retain faith in your holding. Give great companies time to perform for you.
Avoiding just these three classic blunders can help you make a lot more money -- and save you from losing plenty, too.
