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All stock market investors make mistakes, no matter how experienced they are. Warren Buffett lost a lot of money invested in it Tescoadmit that “big mistake“.
The key is to minimize costly rookie mistakes as time goes on. Here are three that stand out to me.
1. Not researching the stock
Many people behave differently with their money in the stock market than they would in other situations.
Investor Peter Lynch captured this well in the quote below:
The public, when they buy a refrigerator, go to consumer reports. They buy a microwave oven, they do that kind of research…They do research on apartments…But people hear a tip on the bus about a certain stock and they’ll put half of their living expenses on it before the sun goes down.
Peter Lynch
Putting money into a stock without doing much (or any) research is gambling, not investing. It’s a way to lose money.
If I don’t know how to do basic stock research, that’s fine. There is a sea of material online to help me learn, including here at The Motley Fool.
2. Trying to time the market
The second mistake I can avoid is trying to time the market. There is a lot of research that proves that most day traders lose money. The market is very unpredictable.
Consider this: between 2004 and 2023, seven S&P 500The 10 best days fell within two weeks of the 10 worst days, according to the report JP Morgan.
The chart below compares someone who was fully invested during that period with investors who missed out on some of the best days due to a temporary exit from the market.
As we can see, missing the best 10 days would have cut the final portfolio value by more than half – from $63,637 down to just $29,154!
This proves the old saying “time in the market beats time in the market“. This is the core part of long-term – i.e. Foolish – investing.
3. Selling stock too quickly
For many investors, the most painful experience isn’t failing to identify a great stock or watching a dud crash and burn. Instead, it is likely to sell the winning company in the near future.
Take it Amazon (NASDAQ: AMZN ), for example. Back when the internet started, a family member of mine was amazed at the selection of books on Amazon (it started as an online bookseller). He was so impressed that he bought shares.
You can probably guess what happens next. Yes, he sold those shares not long ago, making a small bank profit.
Today, the stock is at an all-time high after rising 10,360% in 20 years. The missed benefits are huge.
The thing is, Amazon has never given long-term investors a real reason to sell. It relentlessly captures growth markets, from e-commerce to cloud computing and now digital advertising.
Amazon’s revenue is expected to reach $638bn this year, and top $1trn by 2030!
Alas, I have never owned the stock, and I think the breakup is risky as the tech giant gets bigger and bigger.
But the point still stands. If I sell a high-quality stock in its third year, and miss out on enjoying its 23rd year, I will likely leave countless fortunes on the table.
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