The Number One Mistake Investors Make…

Last week, on Twitter, The Motley Fool asked a question.

They asked followers to name a stock they either: sold too soon, held too long, or wish they had bought.

There was a total of 66 responses.

Here is a breakdown of the number of people that responded to each part of the question:

Sold too soon: 31

Held too long: 8

Wish they had bought: 27

As you can see from the breakdown, stocks sold too soon won by a very slim margin over stocks people wish they’d bought.

This is not surprising – and very insignificant. Hindsight is 20/20. Everyone regrets not buying Microsoft or Amazon after the fact.

What I want to focus on is the group of investors that sold too early, because that, to me, is a very crucial part of investing success.

People that said they regret having sold a stock too soon numbered almost four times the amount of people that regretted holding a stock too long.

Although the mainstream media discourages people from buying individual stocks, the fact is that finding companies that can go on to become big winners is not only not impossible, but is very doable for the average investor.

What is extremely difficult? The ability to hold on to these winners over time.

So…why is it so hard to hold on to winners?

This is a fascinating question, and there is a multitude of possible reasons.

Here are some very viable ones:

1. Buy and hold investing is not innate – it’s learned.

Warren Buffett told a story of a stock he bought for $25. It went to $15 before rallying to $30, at which point he sold it. Over the next few years, that same stock went to $200.

Ron Baron started his career giving clients advice on stocks to buy. He noticed that many of his selections went up five-and ten-fold years after he recommended them.

These are two of the best investors on the planet. They both learned the art of buy and hold through their personal experiences.

2. Fear of loss.

If you purchase a stock at $2, and it goes to $4, you’ve doubled your money. At that point, it’s human nature to protect your profits and sell.

3. Volatility.

I’m sure you’ve heard the stories of what $1000 in Amazon would be worth today if you purchased it when it IPOed. Sounds easy, right? Just buy and sit on your ass.

Well, it ain’t.

You would have to have been able to stomach multiple drawdowns during which the share price was literally cut in half.

In order to accumulate transformational wealth, you must be willing to experience, and fight through, gut-wrenching declines.

4. Impatience.

This is a huge challenge for most investors.

The truth of the matter is that investing is very, very boring.

The best performing stocks in history do nothing 90% of the time.

Netflix traded in the low 20s for two, almost three years, before it exploded and became one of the greatest investments in the last 25 years.

I personally know someone that owned Netflix early and sold because he became impatient. He left at least $700,000 on the table.

5. Owning stocks in the midst of a financial crisis is extremely difficult.

If you owned stocks during the Great Recession, you know what I’m talking about.

Owning stocks during this time was incredibly painful. Companies that had been around for 50 years were going bankrupt. If not for the government bailout, it could have been a catastrophe.

However, that moment in time gave us a chance to buy great businesses at steep discounts. If you bought and held companies that were thriving in spite of the economic environment, and held them, you would have done fabulously well.

It’s important to know that buying and holding will not always work out. That’s why we diversify and invest in multiple businesses.

However…the one time that it works out will more than make up for the times it doesn’t.

For example: let’s say you invested $1000 in three different companies and each company performed as follows:

  • Company number one lost 50%, so your investment is now worth $500.
  • Company number two lost 90%, so your investment is now worth $100.
  • Company number three went up 25 times in value. So your investment is now worth $25,000. That more than covers the $1400 you loss and then some.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)

 

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Read It and Reap.

In my spare time, one of the things I love to do is go to estate sales.

An estate sale takes place when someone, usually a home owner, passes away and their heirs sell all of their earthly possessions.

I enjoy going to them because you can really find some great items, at very reduced prices. I don’t always find something I’m interested in buying, but I enjoy the hunt.

I’ve gone to quite a few estate sales in the last 3 months. The majority of the homes have been in upper middle class and affluent neighborhoods.

It wasn’t until this weekend that something interesting dawned on me…

If I had to put a number on it, I would say that at least 69% of the owners of these homes were avid – some voracious – readers.

And the fascinating thing that dawned on me yesterday was the number of books on investing on the shelves of these wealthy individuals’ homes.

When there was a library in a home, each one, without exception, has had anywhere from five to ten books on investing in the stock market. The professions of these readers included pharmacist, doctor, educator and small business owner. None of these professions were related to Wall Street, but each individual knew that investing in the stock market was a way to build wealth.

Those of us of a certain age remember the phrase, “reading is fundamental”. I think that phrase should be followed by “not reading is detrimental“! And with all due respect, I’m not talking about just reading romance novels, comic books or any other fictional book. I’m talking about reading with the purpose of learning how to build wealth.

It is no coincidence that these people who passed on a significant legacy to their heirs were well read, especially in the area of personal finance.

I know it may seem boring. But so is your health, after all – until you get sick.

There’s a correlation between people that read about personal finance and wealth creation. The more you read, the likelier you are to make good choices with your money.

If you need ideas, check out these books that have influenced me.

 

My book, The Stock Market is For Everyone, is a short guide for the beginning, inexperienced investor that is easy to understand and can be put into action immediately.

Click the image of the book at left to be taken to its Amazon page.  (Disclosure: As a participant in the Amazon Services LLC Associates Program, I earn a small commission on each sale generated through these links.)