5 COMMON MISTAKES EVERY SMART INVESTOR SHOULD AVOID

Investing Mistake #1 – Buying the stocks at high valuations

The difference between an investor who makes money and the one who losses money is his understanding of valuations of the stocks.

When a stock is trading at a high valuation, the possibility of more upside is unpredictable and therefore a common investor gets stuck in this trap and losses money once the stock undergoes a correction.

On the other hand a smart investor reads the valuations of the stock and understands whether the stock is trading at high or low valuations and makes his decisions accordingly.

To avoid committing this mistake always evaluate whether the stock is trading at high or low valuation and then take a decision.

Investing Mistake #2 – Buying more of losers (Price Averaging)

This is another common mistake investors make due to emotional reasons. How many times have you bought a stock then see it go down in value and you bought more quantity of the stock with the motive to average out your buying price. This is called Price Averaging. This strategy makes absolute sense only for high quality stocks and if you’re ready to be patient in long term.

Best example to illustrate here is of TCS. It makes complete sense if you continue buying shares of TCS while it is correcting because given the premium fundamental value of the company it will positively recover from its lows. But by pouring in more money in a company like Suzlon with high debt on its balance sheet will get you nothing but losses.

To avoid committing this mistake, continue price averaging only in stocks with great fundamental value which you can hold for long term. But in case of a bad decision, where the fundamentals of the company is deteriorating, just exit from it and move on.

Investing mistake #3 – Following hot tips or a TV guru

There are lots of TV channels and newspapers around. You get free hot tip every minute. This creates a sense of urgency and forces us to commit an emotional decision.

The so called gurus give you a hot tip every day as the next Multibagger. Have you ever thought ‘If there were so many good stocks around, shouldn’t everyone be rich?’

To avoid this common mistake you can follow an investment guru but before making a decision do your own analysis after all its your money at risk.

Investing mistake #4 – Inadequate research about the stocks you invest in

The most important reason you’ll lose money in stocks is this. One can’t stress enough the research one needs to do before buying a stock. If you don’t have the time or knowledge to do the research, then opt for some reputed advisory firms and let them do the work. If you don’t do proper research, then all you’ll have is a bunch of laggards in your portfolio.

When you buy low quality stocks, you risk your capital to permanent loss. On the other hand, when you purchase a good stock after doing proper analysis you can make sizable profits.

To avoid making this mistake, either opt for a reputed stock market advisory company or invest some time and study in depth about the stocks you want to invest in.

Investing mistake #5 – The price of falling stock can’t go down any further

The price of a stock falls either due to deteriorating fundamentals or market momentum. If it is due to market momentum, the price will eventually be recovered after certain period. It can be the next day or next few years based on when market recovers. But when a stock falls due to deteriorating fundamental, it hardly recovers unless the fundamentals improve.

Many stocks get converted to penny stocks due to changing fundamentals. And they stay there forever. An investor who decides to buy just because a stock has fallen by so much will be in for a big shock.

To avoid this mistake, do some digging and find out the reason why the stock has cracked. If it is because of market momentum, then it is a safe bet.

If you avoid committing these 5 basic mistakes, you will be on a high road to making exceptional gains in your portfolio.

Happy Investing