3 Trading Mistakes Made And What I've Learned From Them

by: Pey Shadzi

Hey, we all make mistakes, right? Like the time I was pulled over by a policeman (rightfully, I might add) at the tender age of 16 while doing 60 MPH in a 25 zone. Or the time I accidentally drank my dad's entire wine cooler, thinking it was a cherry coke. Those were exciting times for a six-year-old.

We all make mistakes either intentionally or irrationally but, you know, sometimes we just need to live and learn. Just like my kindergarten teacher, Mrs. Warmington, always said, It's perfectly alright to make mistakes so long as you learn from them and ensure they do not happen again. Pretty good advice for a kindergartener -- or, perhaps even for the most seasoned of investors doing their best to build up a retirement account.

Despite making claim to many triumphs, I've made some investing mistakes in my relatively short investment career as well. Hopefully we all can learn from each others' mistakes in order to save the heartbreak of having to go through each of these on our own.

Here are some blunders I've made and what I've learned:

1. Be careful buying with the crowd on excitement

Let me take you back to more dire times during the market collapse of 2008. Just after we hit a bottom, one of my buddies couldn't stop bragging about his investment in Joe's Jeans Inc. (NASDAQ:JOEZ), saying he had nearly tripled his money in just a short amount of time. Five months, to be exact. Being a young, impressionable novice investor, I couldn't help but watch as the JOEZ ticker would often make wild upward swings, often 10% in a single day. I kept kicking myself for not jumping in under $0.50 a share when this denim and casual apparel designer sailed past the $1.50 a share mark. I watched as the stock brushed past $1.75, then $2.25, $2.75 and even the $3.00 mark. Many investors were claiming JOEZ would soon hit $10, and it wasn't too late to get on board. One day in 2009, the entire market experienced a pullback and JOEZ took a big hit: 15% in one day. I couldn't think of any better time to jump on board of this bullish wave of investor sentiment. Unfortunately, in hindsight, this was a bad decision, as I purchased a rather large chunk of shares at the all-time high. I watched as the stock plummeted down, down, down back to reality, resting comfortably in the $1.00 a share range where it now sits today.

Lesson learned: Buying a stock because the price keeps going up and up without looking at fundamentals, market trends and competition is downright foolish.

2. Going with the "tried and true" is often more sensible than the "newest, hottest company"

I know what you growth investors out there are thinking: Sure I could buy shares of Johnson & Johnson (NYSE:JNJ) and rely on a stable 3.6% dividend, but I'd rather jump in early with a small cap stock that has the potential to return 1,000%. That's where the big money lies. I can't blame you for thinking this way, but the reality is this is much more risky than it sounds. If we look back to early 2011, it may have seemed incredibly sensible to pick up shares of Green Mountain Coffee Roasters Inc. (NASDAQ:GMCR), rather than its formidable, well-established competitor, Starbucks Corporation (NASDAQ:SBUX). After all, GMCR had much better growth prospects and actually allowed some investors to more than triple their money in just eight short months. But, then again, just a few months later, GMCR gave back all of its gains (and then some).

Lesson learned: Often, picking up shares of a reliable, mature stock with sound long-term growth potential is a much more reasonable long-term way to invest than jumping on the "latest and greatest" money maker.

3. It's always better to be on the sidelines, wishing you had bought than agonizing over a bad investment

You know how it goes; a hot stock tip can prompt you to run to a computer and make some pretty rash decisions, buying shares of a stock at just about any price. Your heart starts pumping, your fingers tremble just a little; it's just human nature. Last month I watched as shares of SuperValu Inc. (NYSE:SVU) slid from a 52-week high of $10.41 to a 52-week low of $5.13 in April. Seems as good of time as ever to jump on board. Look at that 7% dividend! But SVU continues to slide and disappoint day after day. With a current share price of $4.76, I feel like kicking myself for not waiting it out just a little longer to evaluate the market trend. Like the old saying goes: Never try to catch a falling knife.

Lesson learned: Any trade that can be made today can also be made tomorrow, often at a much more reasonable share price. There will always be another great company out there happy to collect your hard-earned dollars in exchange for share of its stock. There will always be another "got to have it" company trading at reasonable valuations, so it pays not to make any rash decisions and to think through things without with less emotion.

The bottom line

We all make mistakes from time to time. God knows I've made quite a few in my lifetime, and I'm still a relatively young guy. If we can evaluate our past trading habits while picking out ways to improve our ability to invest our hard-earned dollars with less emotion and more rationale, we'll likely be less inclined to continue making the same mistakes while growing our investment accounts.

Disclosure: I am long (SVU), (JNJ).