Saturday, February 20, 2010

7 Investment Sins

In making any investment decisions, there are often things we do or fail to do that results in disastrous investment results. This can be called sins of commission or omission. Either way, the result is a bad investment decision. I gleaned this of from a book that I have been reading and tried to contextualise it into our current context.

Here are seven common sins that are made in investment decisions:

1. Buying risky penny stocks without any fundamentals.
2. "It will be different this time".
3. Falling in love with the stock.
4. Panicking when Market crashes (remember 2008?).
5. Thinking you can time the market.
6. Ignoring valuation.
7. Relying too much on price-earnings ratio. (Cash flow is what matters).

The advice above is timeless. We should be careful not to fall into these mistakes. I know some people will think differently about some of the points listed here.

Nevertheless, I think the advice from the book will go a long way in guiding you when you make any investment decision. So instead of making these mistakes, here are some things that you should do instead:

1. Focus on finding solid companies or businesses with shares selling at low valuations.
2. Understand market history, read past stories.
3. Don't get swept away by exciting new products or businesses. Check out the business model first.
4. Fear is your best friend. The best time to buy is often when people are panicking.
5. The market cannot be timed.
6. Pay attention to valuation. Don't hope that some other investor will buy at higher prices.
7. Cash flow (operating cash flow minus expenditures) is what is important for a company's financial performance.

I hope these tips help.

6 comments:

  1. How you know the difference between low valuation and cheap?

    ReplyDelete
  2. After knowing so many aunties and uncle who play stock...i realize the common sins is

    1) Do not read charts and yet want to play stock

    2) Believe too much in their broker

    ReplyDelete
  3. Hmm..

    Not only uncles and aunties, I know some hard core value investors also don't read charts.

    ReplyDelete
  4. Sometimes charts are also not accurate. That is why some people just don't bother to look at them if they intend to invest for the long term

    ReplyDelete
  5. Invest in a good business and let the profits and cash flow reward you over a lifetime. Why is there a need for charts?

    ReplyDelete
  6. Yes MW,

    Investing in a good business is really important.

    I guess too often we take investing in stocks like somekind of gambling.

    FOR EXAMPLE:
    If today, I were to approach you personally and ask you to invest in my hypothetical tuition business, the kind of questions that most investors will ask are probably FA type of questions rather than TA kind of questions.

    Food for thought

    ReplyDelete

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