Page 1

Twenty Most Common Mistakes Investors Make When Investing in the Stock Market Knute Rockne, the famous Hall of Fame Notre Dame football coach, used to say, “Build up your weaknesses until they become your strong points.” The reason most investors constantly loose money in the stock market is they simply make too many mistakes. It’s the same in your business, sports and life in general. You never fail because of your strengths. It’s always the mistakes or weaknesses that you do not recognize and correct that bring you down. Most people just blame somebody else, such as your advisors. It is much easier to have excuses than it is to examine your own behavior realistically. Don’t feel bad. It’s human nature. From my years in the industry, managing the emotions of hundreds of investment clients and endless research, I’ve identified the twenty most common mistakes investors make. Study them closely, educate yourself and arm yourself with knowledge. It’s imperative to your investment success.

Market Timing Academy

#1: Living in denial and stubbornly holding onto your losses when they are very small and reasonable. Most investors could get out quickly when they have made a mistake, but because they are human, their emotions take over. You don’t want to take a loss, so you wait and you hope, until your loss gets so large it becomes almost impossible to recover. From my experience managing client emotions, this is by far one of the greatest mistakes nearly all investors make. As the world famous investor William O’Neil say’s “All stocks are bad. There are no good stocks unless you make money when you sell”. Without exception, you should cut every single loss short. The rule I have taught all of our investment clients is to always cut all your losses immediately when a stock falls 7% or 8% below your purchase price. Following this simple rule will ensure you will survive another day to invest and capitalize on the many excellent opportunities in the future.

#2: Buying what is down in price rather than a stock making new highs.

Committed to helping the individual investor time the market just like the pros

Twenty Most Common Mistakes Investors Make When Investing in the Stock Market I used to get this call all of the time from my clients. “Hey, XYZ is down over 10% today. Let’s buy some. It’s a bargain.” Buying a declining stock makes you feel like you are getting something on sale. This very rarely works. A stock is down typically for reasons you should avoid it. For example, in late 1999, a client bought Xerox when it dropped abruptly to a new low at $34 per share and seemed really cheap. A year later, it traded at $6 per share. Why try to catch a falling knife? Many people did the same thing in 2000, buying Cisco Systems at $50 on the way down after it had been at $82. It never saw $50 again, even in the 2003 to 2007 bull market. In fact in June of 2010 you could buy it for $21 per share.


Averaging down in price rather than averaging up when buying. If you buy a stock at $40, then buy more at $30 and average out your cost at $35, you are following up your losers and throwing good money after bad. This amateur strategy can produce serious losses and weigh down your portfolio with a few big losers. Again, this sounds like common sense, but most investors don’t recognize it. A stock that is moving down is moving down for a reason. Either the company is sound and the broad market is in a downtrend or the stock itself is not what you thought it was. Either way, you need to protect yourself and look to cut your losses, not buy more. Avoid the big


Not learning to use charts and being afraid to buy stocks that are going into new high ground off sound bases. The public generally thinks that a stock making a new high price is too high to buy, but personal feelings and opinions are emotional and far less accurate than the market itself. The best time to buy a stock during any bull market is when the stock initially emerges from a price consolidation or a sound basing pattern of at least seven or eight weeks. Get over wanting to buy something cheap on the way down. It’s going down for a reason.


Being lazy and not establishing sound selection criteria and understanding exactly what to look for in a successful company. Do your homework. Arm yourself with education. You need to understand what fundamental factors are crucial and what are simply not that important! Many investors buy fourth-rate, “nothing to write home about” stocks that are not acting particularly well; have questionable earning, sales growth, and return on equity; and are not the true market leaders. Others overly concentrate in highly speculative or lower-quality, risky technology securities.

disasters in your portfolio. That is how you make consistent results. 2

Twenty Most Common Mistakes Investors Make When Investing in the Stock Market


Not understanding the true direction of the overall market and recognizing when a market decline is most likely or a new uptrend is confirmed. It’s critical that you be able to recognize market tops and major market turnarounds coming off the bottom if you want to protect your account from excessive giveback of profits and significant losses. Likewise, you must know when the correction is


Failing to understand the importance of buying high-quality companies with good institutional sponsorship. Always pay attention to what the pros are buying. They are the ones that buy enough shares to move a stock. Make sure you are on the right side of the institutional market.

over and the market tells you to buy. You can’t go by your opinions or feelings. You must have specific rules and follow them religiously.



Many of my clients are more concerned about

Letting your emotions drive your decisions rather than following your buy and sell rules. Never become emotional about the stock market. The soundest rules you create are of no help if you don’t develop the discipline to make decisions and act according to you historically proven rules and game plan.

Buying more shares of lowpriced stocks rather than fewer shares of higher-priced stocks. buying more shares of a stock with a lower price than few shares of a stock that has a higher price. Remember, there is a reason the lower price stock is lower in price. It typically is not for good reasons. Some of the strongest companies in this market trade for over $200 per share. Think in terms of dollars when you invest, not the number of shares you can buy. Buy the best merchandise available, not the cheapest. If you buy $10,000 of a $5 stock and the


Concentrating your effort on what to buy and, once the buy decision is made, forgetting to manage your position.

stock moves 20% you make the exact same that you would if you buy $10,000 of a $100 stock. You don’t get more bang for your buck by buying more shares of a cheaper stock.

Most investors have no rules or plan for selling stocks once they buy. 3

Twenty Most Common Mistakes Investors Make When Investing in the Stock Market


Buying on tips, rumors, split announcements, and other news events; stories; advisory-service recommendations; or opinions you hear from other people or from supposed market experts on TV.

that you can lose the amount of a dividend in one or

Do your research. There is no easy way out. Many


people are too willing to risk their hard-earned money on the basis of what someone else says,

two days’ fluctuation in price of the stock. As for P/E ratios, a low P/E is probably low because the company’s past record is inferior. Most stocks sell for what they’re worth at any particular time.

Wanting to make a quick and easy buck.

rather than taking the time to study, learn, and know

Again, I saw this mistake made by almost every

for sure what they’re doing. As a result, they risk

single client. Wanting too much, too fast without

losing a lot of money. Most rumors and tips you

doing the necessary preparation, learning the

hear simply aren’t true. Even if they are true, in

soundest methods, or acquiring the essential skills

many cases it is already priced into the stock and

and discipline to be a successful investor. Chances

when the event actually takes place, the stock

are, you’ll jump into a stock too fast and then be to

concerned will ironically go down, not up as you

slow to cut your losses when you are wrong.



Selecting second-rate stocks because of dividends or low price/earnings ratios.


Buying old names you’re familiar with. Just because you used to work for General Motors doesn’t necessarily make it a good stock to buy. As

Dividends and P/E ratios aren’t anywhere near as

I was a broker in the Detroit area, I had a number of

important as earnings per share growth. In many

General Motors employees as clients. It was like

cases, the more a company pays in dividends, the

pulling teeth to get them to part with that stock.

weaker it may be. It may have to pay high interest

Very few actually would. Well their emotions got in

rates to replenish the funds it is paying out for the

the way and most never saw GM was headed in the

form of dividends. Better performing companies

wrong direction. As a result they watched their life

typically will not pay dividends. Instead, they

saving get destroyed as GM went into bankruptcy.

reinvest their capital in research and development or

Remember, many of the best investments will be

other corporate improvements. Also, keep in mind

newer names that you won’t know, but that, with a


Twenty Most Common Mistakes Investors Make When Investing in the Stock Market little research, you could discover and profit from

giving your profits more time. So many of my

before they become household names. Did you

clients would say, I have not lost money in this stock

recognize the name Google ten years ago?

because I have not sold it. Trust me. When the stock is down, you have lost money‌


Not being able to recognize (and follow) good information and advice.


Friends, relatives, certain stockbrokers, and advisory

The name of the game is to first make a net profit.

services can all be sources of bad advice. Only a

Excessive worrying about taxes usually leads to

small minority of people giving advice are

unsound investment decisions in the hope of

successful enough themselves to merit your

achieving a tax shelter. You can also fritter away a

consideration. Outstanding stockbrokers or advisory

good profit by holding on too long in an attempt to

services are no more plentiful than outstanding

get a long-term capital gain.

Worrying way too much about taxes and commissions.

doctors, lawyers, or ballplayers. Only one out of nine baseball players who sign professional contracts ever make it to the big leagues. Most of the

The commissions associated with buying and selling

ballplayers coming out of college simply are not

stocks, especially through an online broker, are

professional caliber. Many brokerage firms have

minor compared with the money to be made by

gone out of business because they couldn’t mange

making the right decisions in the first place and

their own money wisely. Look what happened to

taking action when needed. The fact that you pay

Merrill Lynch. They had to be bailed out by Bank of

relatively low commissions and you can get out of

America due to poor investments and leverage.

your investment much faster are two of the biggest

Better yet, look how many people blindly trusted

advantages of owning stock over owning real estate.

Bernie Madoff and lost everything. You have to do

People can get over their head in real estate and lose

your own homework. Trust no one blindly.

money if they overstep themselves. With instant liquidity in equities, you can protect yourself quickly at low cost and take advantage of highly profitable


Cashing in small, easy-to-take profits and holding the losers.

new trends as they emerge.

In other words, doing exactly the opposite of what you should be doing: cutting your losses short and 5

Twenty Most Common Mistakes Investors Make When Investing in the Stock Market



Some investors also focus mainly on shorter-term,

Many investors don’t know whether they should

lower-priced options that involve greater volatility

buy, sell, or hold, and the uncertainty shows that

and risk. The limited time period works against

they have no guidelines or rules. Most people don’t

holders of short-term options. Some people also

follow a proven plan, a set of strict principles or buy

write “naked options” (selling options on stocks they

and sell rules, to correctly guide them. Make sure

do not even own), which amounts to taking greater

you set up non-emotional guidelines. This will help

risk for a potentially small reward. Make sure you

you avoid the most common mistake, getting

completely understand how options or futures work

emotionally involved in the stock market.

Speculating too heavily in options or futures because you see them as a way to get rich quick.

Not being able to make up your mind when a decision needs to be made.

prior to delving into this world. It’s very complex. I’ve seen too many investors loose it all because they don’t truly understand what they are getting into.

Bottom Line How many of these describe your own past investment beliefs and practices? Poor principles


Rarely transacting “at the market”, preferring instead to put price limits on buy and sell orders. By doing so, investors are quibbling over eights and quarters of a point (or their decimal equivalents), rather than focusing on the stock’s larger and more important movement. With limit orders, you run the

and methods yield poor results; sound principles and methods yield sound results. As knute Rockne says, “Build up your weaknesses until they become your strong points.” It takes effort and time to properly arm yourself with knowledge. Trust no one. Take the time to become a great investor. Learn from your mistakes. That is the only way you will become a great investor.

risk of missing the market completely and not getting out of stocks that should be sold to avoid substantial losses. The markets are much more efficient than they used to be. Don’t worry about getting a bad fill.


Twenty Most Common Mistakes Investors Make  

The twenty most common mistakes individual investors make when investing in the stock market.