Full Disclosure Finance

By Justin

Here are some common amateur investing mistakes in the form of a top five list. Some of these I have first hand experience making, others are taken from educational sources. In reverse order so I can build up some drama for #1, they are:

#5 Lack of mentors / Co-pilots
Early on I went out and bought all the books I could about investing. After thorough reading and learning steadily, I wanted to share and discuss what I had learned. Andrew was also keen and just getting into investing like me. It is great, because after I read about a topic, say options, we would discuss it and look at various ways to use the knowledge gained.

I couldn’t imagine not having someone to discuss investing topics with. It would be very difficult to maintain a steady pace of learning and a high interest level if reading out loud was the closest thing you had to an investing discussion.

A mentor is also critical. Discussing your activities with someone you respect that has been investing successfully for a long time will provide insight and speed up your learning process. Andrew and I walked into the office of an investment firm this summer and asked to talk to someone about getting into IPOs or private funding for some local companies. We were put in touch with an advisor who sat down with us for 30 minutes discussing our activities to date and giving us some perspective. To date I am still in touch with him on a regular basis to discuss stocks like ATS (TSX:ATA), Sandvine (TSX:SVC), and Plutonic Power Corporation (TSX:PCC). If I am confused about the behaviour of a stock in my portfolio, I give him a call and spend time discussing it to learn what I am missing.

#4 Becoming a One Source Investor
In the business section of the Globe and Mail, each week they feature an amateur investor and detail his or her portfolio. They often started investing after reading a certain book, say The Intelligent Investor by Benjamin Graham. The individual then followed the book and bases all investing decisions on the recommended method. There was no mention of their intentions for continuous learning.

I think this strategy totally misses the point. Constantly increasing your financial education should be the focus.

It makes sense to me that you would follow a system, but you had better be well versed in other perspectives. I personally need to do some reading on efficient market theory. I’m currently working on a post related to it and have found it both refreshing and interesting.

In a subject area as complicated as investing, it is too risky to act based on limited sources of information.

#3 Too Little Homework

If Kramer says to do 1 hour of homework per month for every stock you own, that is probably good advice. It would be an amateur move to buy and then check the stock price every day but nothing else. Monitor the performance of a firm’s customers, competitors, and any news releases made because it will help explain any movements in the price of your firm’s stock.

Monitoring price consistently is also key if you plan on investing more into the firm when a buying opportunity arises.

#2 “I have a good feeling about this one”
C’mon, we’ve all done it. Except most of us did it at the casino! The overquoted cliché about removing emotion from your investment decisions applies once again. Investopedia has a space where you can enter in your reasons for buying. This is something that you can do on your own in Word or Excel. If you can provide objective reasons for your purchase based on data, not advice, then you’ve probably done the best you can.

#1 Being Fully Invested
This means all of the money you devote to investing is currently active. That way when a great opportunity arises, you are not able to capitalize, or you have to sell a current investment to get into another one.

You could avoid all of the above mistakes, but if you’re fully invested it doesn’t much matter. I pulled this genius move off so on Aug 16, 2007 when Apple was at $117, down from $140, with the Canadian dollar at $1.0754 USD, I didn’t have anything to pull the trigger with. Obviously, hindsight is 20/20 and all that, but I was ready to go on it, you have to believe me!!

Anyways, I read an article where the author stated that he keeps 10% of his account in cash to allow him to capitalize on great buying opportunities. I like this idea and am working towards that over the next few months.

I need you help to compile a top 10 list of amateur investing mistakes. Send them over!