Throughout the years, we have seen volatile markets from the dot-com bubble to the financial crisis. As the markets rise and fall, so do the emotions of investors. As investors become clients through the years, we’ve seen a wide variety of mistakes. They’ve made mistakes either through investing on their own or from misguided advice. Let’s look at some of the most common mistakes we’ve seen.
1. Not Doing Your Homework
Easily the most common mistake we see investors make is taking the markets too lightly, thinking investing is easy or simple. When the markets are climbing higher every minute, every investor feels he is smarter than the average bear. It’s the market’s rough patches that separate the savvy investor from the crowd. When it is easy to pick stocks is probably the time you shouldn’t be doing it, because people tend to cut corners. They see a stock with an attractive price-to-earnings ratio, and they buy it without further researching the fundamentals of the company. We feel investors need to do as much homework as possible before they make the decision to buy.
2. Buying on the Way Down
There is a difference between buying when the market is down—what Dr. Gene likes to refer to as “stocks on sale”—and buying a sinking ship. What may look like a value may not be cheap. The stock could be cheap for a reason. A stock that is down 50% may not necessarily be a good value, because there may be news that you don’t know about that warrants the discount. If a company has lowered their earnings guidance, and the market beats up the stock price, the P/E could easily be the same before the 50% drop in price.
3. Ignoring Economic Cycles
Stock prices, generally, follow the long-term trend of corporate earnings. An investor has to be very familiar with the business cycle to be in the right sector at the right time. If the economy has recently tanked, often the first sectors to bounce back are the cyclical stocks, like Materials and Industrials. Likewise, at the top of the business cycle, the stocks that are the cheapest in the market are likely the ones that will get hurt the most when the tide changes, because their earnings will fall.
4. Not Considering Dilution
While mergers and acquisitions are usually good for companies, you usually do not want to own a company that continuously issues more shares to finance the acquisitions. The more shares available on the market, means a reduction in earnings per share. We feel investors should look for companies that buy other companies to add to earnings. When a company adds to the number of shares outstanding, it reduces the value of holdings of existing shareholders.
5. Buy and Forget vs. Buy and Hold
Investing is not about buying a stock, putting it in a trunk, and then you forget it. A stock portfolio requires maintenance, where you review your holdings on a regular basis to make sure they still meet your criteria and goals.
6. Giving into Fear
It is undoubtedly difficult to open your statement to see you had $100,000 invested, and it is now worth $50,000. This is especially true when the news channels are constantly talking about how bad the market is. One thing we feel investors need to remember is that it is not when you buy, but when you sell. The tangible value of the companies has not gone down—it is just what the market shows at this point in time. If you sell, you realize the loss. If you ride the storm out, your stocks have the potential to rebound. If you took away the 10 best trading days between 1900 and 2008, the Dow Jones Industrial Average would lose two-thirds of its cumulative gain. Likewise, if you missed the 10 worst days in the market, you could have tripled the Dow return. However, these days represent 0.03% of the trading days over a span of 109 years. You just cannot time the market.
At Henssler Financial we believe you should Live Ready, which includes dedicating the time to due diligence and to learning about the market before you invest. Investing is not for the faint at heart. It takes patience, persistence and time. If this is more than you want to handle, the experts at Henssler Financial will be glad to help. You may call our experts at 770-429-9166 or e-mail at experts@henssler.com.