As a beginner in anything, it is easy to make mistakes. But when it comes to investing, mistakes can be costly. That’s why I appreciate anything that shortens my learning curve when it comes to choosing shares. Here are three new investor mistakes I made – and learned from.
New investor mistake 1: overreaching my competence
A common mistake is buying into shares one knows almost nothing about. In the book, The 7 Habits of Highly Effective People, Stephen Covey emphasises the value of staying inside one’s “circle of competence”. By sticking to what we know, we are more likely to succeed. That doesn’t mean never doing anything new – it’s possible to grow one’s circle of competence over time, for example.
But right now, I know very little about the telecoms market in Africa, for example. So I will not invest in a company like Airtel Africa. Instead, I would rather focus on companies I feel I understand. For example, I am a customer of companies including Wetherspoon and IAG. That helps me understand at least some aspects of their business firsthand.
New investor mistake 2: lack of research
Being a customer gives me some insight. But it might not be the insight that matters.
For example, knowing how busy a pub or plane I use is doesn’t tell me whether those customers are actually profitable for the company. It also doesn’t help me assess how attractive a share is. A company can be successful and profitable, but if its shares are very highly priced, they could be bad value. That’s a criticism many analysts level at Tesla.
As a new investor, one of my mistakes was looking at just a few details about a company. For example, I would judge a company based on earnings per share or turnover alone. Those are informative indicators, but not in isolation.
For example, a company with a strong business can be undone by an overwhelming debt burden. It’s easy enough to look at the balance sheet in an annual report to see how much net debt a company carries. But a common new investor mistake is not looking at a company’s financial reports at all. Such reports are usually available free online and many companies will post a hard copy on request to potential investors. Nowadays, the more research I do, the more comfortable I feel about my investment choices.
New investor mistake3: impatience
Famed investor Warren Buffett says his favourite holding period for a share is “forever”.
But like many novice investors I used to think that moving in and out of shares rapidly could lead to riches. That new investor mistake hurt me in two ways.
First, trading costs ate into profits quickly. Even a small cost can add up fast if applied frequently. Secondly, selling a winning share too soon meant I missed out on bigger gains. Some people say “no-one lost money taking a profit”. But I think that misses the point. If one invests in high-quality, well-researched shares with long-term growth prospects, why sell so fast? These days I prefer to wait and let time work its powerful magic.
The post 3 new investor mistakes I made appeared first on The Motley Fool UK.
Christopher Ruane has no position in any share mentioned. The Motley Fool UK owns shares of and has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021