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5 Investing Mistakes You Should Never Make

Aug 17, 2021

Investing is important, if not critical. You work hard for your money and your money should work hard for you.

Not investing, or not doing it properly, can mean a longer working life. But when done right, the returns generated from your investments can change everything for you.

When learning how to invest, it's important to learn from the best. But it also pays to learn from the mistakes of others.

Here are the top 5 investing mistakes you should never make.

#1 Invest late

Investing is all about starting at the top of a hill with wet snow and allowing a small snowball to roll down the hill. The size of the ball is secondary.

What matters is how high the hill is i.e. the number of years of compounding you have ahead of you.

Therefore, one of the biggest mistakes people can make is to start their investing journey late in life.

Investing, as with anything in life, benefits from an early start. In investing, slow and steady is good.

Early and often is better. When you start saving early, your money has more time to grow. Time allows you to take risks.

Moreover, you bene?t from the power of compounding - your investment earns income and that income earns more income. So, the sooner you start, the better your chance at building wealth in the long term.

#2 Invest based on opinions and not facts

There is nothing wrong with asking for the opinions of friends and family. But there is a lot wrong when you make the mistake of confusing opinions with facts.

When you make that error, you run the real risk of running your financial ship aground irreparably.

Your job as an investor is to assess which sources of information should be trusted, and have demonstrated a reliable and ongoing trend of wisdom.

Once you have identified those individuals or services that may lead to profits, you should still only partially rely on their thoughts, and combine those with your own due diligence and opinions to make your investment decisions.

Investment due diligence is what separates successful investors from novices.

Before handing over your money, thoroughly investigating each investment, broker and money manager can protect you from catastrophic loss and help you make more profitable, informed investment decisions.

#3 Not seeking a margin of safety in valuations

Seeking a margin of safety in valuations means purchasing securities when the market price is significantly below its intrinsic value. This difference allows you to invest with minimal downside risk.

Having a margin of safety is all about price. It's designed to make you money by not losing money.

Warren Buffett is a staunch believer in the margin of safety and has declared it one of his cornerstones of investing. He has been known to apply as much as a 50% discount to the intrinsic value of a stock as his price target.

Now, what happens when you don't have a margin of safety?

You end up overpaying for stocks. You also don't have any room for error if you are wrong in your judgement. This could mean more risk in addition to the many risks that fundamental analysis cannot estimate such as politics, regulatory actions, market moves, and natural disasters.

#4 Investing in companies with leveraged balance sheets

Statistically, it has been observed that companies prefer debt over equity because of its easy and cheap availability.

However, a company with too much debt is not a desirable investment option. This is because too much debt brings with it the burden of interest payment.

A company with high debt is also going to have a hard time paying back its loan if the economy starts to sink. It will have a difficult time surviving a downturn.

We know from experience that downturns in the economy do occur, but no one knows when.

So, to avoid considerable losses in your portfolio, one should always avoid companies that resort to exorbitant debt financing.

#5 Give in to greed and fear and not assess fundamentals

Wall Street has an old saying that the market is driven by just two emotions - greed and fear.

Although this is an oversimplification, it can often ring true. Succumbing to these emotions can profoundly harm investor portfolios, the stock market's stability, and even the economy on the whole.

When investors find themselves outside of their comfort zones due to losses or market instability, they become vulnerable to these emotions, often resulting in very costly mistakes.

One must avoid getting swept up in the dominant market sentiment of the day, which can be driven by irrational fear or greed, and stick to the fundamentals.

So, what should you do instead?

Your best bet to make the most of your investments is to be thorough with your research and make informed decisions grounded in facts as opposed to instinct or emotions.

Choose a suitable asset allocation. When you invest in a company, look at it from a 360-degree perspective to see if it is a worthwhile investment.

It also pays to remember that assets linked to the financial markets may fluctuate in value. A buy and hold strategy will help you avoid the stress related to timing the market.

Ayesha Shetty

Ayesha Shetty is a financial writer with the StockSelect team at Equitymaster. An engineer by qualification, she uses her analytical skills to decode the latest developments in financial markets. This reflects in her well-researched and insightful articles. When she is not busy separating financial fact from fiction, she can be found reading about new trends in technology and international politics.

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2 Responses to "5 Investing Mistakes You Should Never Make"

Ritu Sachdev

Aug 21, 2021

I totally agree with Ayesha Shetty's views on the 5 investing mistakes everyone should try to avoid. Thank you so much for this insightful article



Aug 17, 2021


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