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Investment Mistakes

February 10, 2007

August 8, 1999. Can you imagine anybody buying American Online at the price of $78 at the beginning of the year and seeing it rise to $178 and not selling at about $158. Well, guess what, many investors are crying in their towels at this moment because American Online is trading at $85 as of this writing.

What would you have done? Hold on for the longer view or sell out at a much lower price. Or how about waiting until it goes back up to the years high? How do you know it is going to reach higher levels in the near future anyway?

Internet stocks are very risky, even though they have the potential for good results. In my opinion I would have sold at the $158 level because it seemed that the traders were jumping off at an alarming rate, these guys are not stupid. They know when to get back on and when to jump off.

Of course that is one scenario on investing, there are many others. And that is why I claim that the best way to invest in the market is for the long term with good companies that have good growth earnings.

Fear and greed move the markets and that is why people make serious mistakes about investing. We think we make rational decisions. More often, we veer from hope to fear and back again, without putting our brains into gear at all.

Bull markets intensify these feelings, especially among investors who do not have much experience. We take great pains and unusual risks to avoid a loss, maybe because it's a blow to the ego as well as the wallet. We cling to stocks that go down, expecting them to come back up to the price we paid as if natural law ordains they should.

Most investors think that paper losses are not the same as "real dollar" loses. I have bad news for you, they are real loses! If you would have sold American Online at $158 you would have put in your cash account a 102% gain on that particular stock. Instead you have only a 8.9% gain. Is that a gain or loss? You the investor have to decide.

One problem is that with a bull market we become over-confident in our buying and selling technique. Make two right investment calls in a row, and suddenly you are a guru. If you have a loss, you had bad luck. Wrong.

Here are some investor behavior facts:

Overconfidence leads to more frequent trading. However, the stocks people buy do not do as well as the stocks they sell.

On average, the more you trade, the less you make.

Men trade more than women. Women's accounts perform better.

Another point that I have learned is that the more you study, the more likely you will be a better investor.

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