Investing in the stock market can feel like a huge maze. Over time, you figure out what works and what’s just a waste of time (or money). Here’s a list of mistakes I’ve learned to avoid. Trust me, these can save you a lot of headaches.
The Most Important Rule
- Build Your Own System: Don’t blindly follow what others are doing. You need your own way of researching and making decisions. This way, you’re not relying on someone else to tell you what’s good or bad.
Stock Market Tips
- Speculative Stocks: These are risky and mostly work during bull markets (when everything is going up). Outside of that, it’s hard to win because their price often depends on hype.
- Know the Big Picture: Keep things simple when understanding the economy. Tools like The Economist app can give you a quick view of how countries are doing financially.
- Thin-Margin Businesses: Companies that make tiny profits on lots of sales don’t last long. They can’t raise their prices easily, which makes them weak when costs go up.
- Watch the Balance Sheet: If you see weird jumps (either good or bad) in a company’s financials, pay attention—something could be off.
How to Avoid Losing Money
- Crazy High Valuations: Be careful with stocks that have a super high price compared to their earnings (a forward P/E ratio over 35). But don’t ignore them just because of this—some industries are naturally pricey.
- Too Cheap or Too Expensive: Stocks that are dirt cheap or ridiculously expensive often come with problems.
- Margin Is Key: Great companies don’t sacrifice their profits just to sell more stuff.
- Earnings Check: If a company’s first-half earnings are way behind their full-year forecast, it’s usually a bad sign.
Avoid These Bad Habits
- Buying at Breakouts: If a stock suddenly shoots up, don’t chase it—it often falls back down. Wait for it to hit support (a price where it usually bounces back).
- Speculative Watchlists: Don’t keep a list of super risky stocks—it’ll just tempt you to do something dumb.
- Too Many Stocks: Owning more stocks doesn’t mean you’ll do better. Start small and add more slowly.
- High Debt and Buybacks: Be cautious with companies that borrow a lot or constantly buy back their own shares.
Red Flags to Watch For
- Profit Warnings: Companies rarely warn just once. If they give bad news, it’s often the start of a bigger problem. Example: I held ASOS after they said, “The first 3 weeks of the quarter are slower,” thinking it wasn’t a big deal. Later, the stock tanked 40%.
- Director Buys/Sells: Don’t put too much trust in whether company insiders are buying or selling their shares. Example: Vistry directors bought shares, but the price still dropped 40%. Churchill China directors sold shares, and the price skyrocketed 200%.
- Chat Rooms: Avoid online stock chats—they’re full of hype and rarely focus on the negatives.
Tips to Stay in Control
- Don’t Fear Price Moves: Just because a stock’s price drops or rises doesn’t mean you should panic. Stick to your plan.
- Keep Losses Small: A small loss won’t ruin your strategy, but a big one can throw you off. Big losses often lead to bad decisions.
- Cash Isn’t a Hedge: Keeping your money in cash won’t protect you from market risks—it just keeps you out of the game.
What Really Matters
- Look at valuation: Is the price fair?
- Check the trend: Is it moving up or down overall?
- Focus on margin: Are they making enough profit on what they sell?
- Read company updates: Do they sound confident about the future?
- Check ROCE (Return on Capital Employed): This tells you how efficiently a company is using its money.
Final Advice
If something feels off with a stock, don’t wait—get out. It’s better to prevent a disaster than try to fix one after it happens. The market is tough, but if you avoid these mistakes and stay disciplined, you’ll have a much better chance of success.
