I've written more articles about the mistakes I've made in investing than I'd care to count. Still, it's an important subject to reflect on now and then. We all do regrettable things in our investing careers, after all, and if we're smart, we spend some time thinking about them and learning from them.
Here are a few of my own bone-headed moves, some of the things I did in the past that didn't work:
- Choosing stocks on little more than a whim.
- Buying into companies that I hardly understood.
- Thinking I was researching sufficiently by looking at a few numbers like the P/E ratio and profit margins, but not appreciating how they differ between industries and how to truly interpret them.
I can't fault myself too much, though. I was simply a beginning investor, and we all have to start at the beginning. Most of us make beginner mistakes before moving on to making more sophisticated mistakes.
Lessons learned
Here are some of the things I've learned along the way -- I suspect many of them are familiar to you, too:
- Most of us are not as of good stock-pickers as we think we are. Therefore, we might do well to let some trusted stock studiers recommend stocks for us to look into, and we might consider letting some skilled money managers work for us, such as through good mutual funds. I've been doing both. I've gleaned a bunch of solid stock and fund ideas from our various Fool investing newsletters.
- We should diversify our holdings and not just buy exciting stocks that catch our fancy. They may carry the possibility of wild outperformance, but they may also be extra risky. I still include some riskier stocks in my portfolio -- I'd classify Netflix as one -- but if you take care to balance them with more stable and established companies such as pharmaceutical giant Novartis (NYSE:NVS), then you'll probably end up okay.
- We shouldn't own too many companies, as it's best to have our money invested in our best ideas, not languishing in companies in which we have only half-hearted confidence. I believe in this, but I confess that I still need to pare down my portfolio to a more manageable number of holdings.
- We should be patient and aim to hang onto stocks for a long time, so that they can really reward us. (Of course, we should watch them and sell if the situation changes.) Many forget this lesson. Think of the long-term winners you know, such as Best Buy (NYSE:BBY), Cisco Systems (NASDAQ:CSCO), and Amazon.com (NASDAQ:AMZN). They've appreciated considerably over long periods of time, but they've also gone through some lengthy spells where they didn't do much. If you'd given up during the slow times, you would've missed out on some big gains.
- We should respect the power of dividends to richly reward us, far more than we might have imagined. I came to this lesson later in life than I would have wished, but I'm here now, and can attest that stocks like Johnson & Johnson (NYSE:JNJ), Coca-Cola (NYSE:KO), and McDonald's (NYSE:MCD) can form the foundation of a great portfolio.
These might seem like simple lessons, but they're the kinds of lessons we can be resistant to learning. It's hard to admit that someone else might be better at investing than you are, for example. It's hard to embrace a seemingly fuddy-duddy dividend payer when you might instead invest in an exciting company that's searching for gold or trying to cure cancer. But ignore a few of these lessons, and your retirement might end up a few more years away than you thought it would be.
You can learn more lessons and glean some investing ideas in these articles:
