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Chris Bluem
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Retail investor seeking long term investment opportunities.
  • Don't get burned by these all too common investor mistakes 0 comments
    Jul 18, 2011 10:00 AM | about stocks: SIRI


    As a retail investor our simple goal is to save money while gaining a high return than a savings account would provide. The almost zero interest rates and recent run up in overall equity prices has brought many new retail investors into the market. I know myself, as well as many others made our share of mistakes when we first began and I truly hope some of these tips will assist people in avoiding the mistakes myself as well as friends have made.

     

    Do your research

    Plenty of quality research is available out there online through various news sources. Seeking Alpha is an excellent source, along with whatever brokerage service you use to begin. These brokerage services such as Fidelity, Scottrade, Etrade, etc. all provide professional information and detailed analysis of whatever equities, bonds, commodities, or any other investments you may want to purchase. I'd highly recommend that not only you understand and research the key research and fundamentals of your investment, but you must understand what they key ratios mean such as price/earnings ratio, payout ratio, return on equity, and many others. I highly recommend the use of not only these key ratios, but a blend in the use of technical analysis, as well as growth prospects, quality of management, and macroeconomical conditions.

     

    Don't necessarily follow what you read

    Media is most certainly a necessity as it has its due diligence in quality reporting. However, especially in investing many of these reports and predictions are bias, poorly researched, or just plain wrong. So as with any other topic don't necessarily do everything reporters say but rather use it as a foundation for research. As you become more experienced you will find authors which are of the highest quality and you will be able to base research off of what these professionals do. Some of these authors which I choose to follow would be those such as Cameron Kaine, Rocco Pendola, and Investment Underground just to name a few on this sight. Media is a great place to start, but other research through quantitative and qualitative analysis is a must before making an investment decision.

     

    This is not a get rich quick kind of ordeal

    If your looking to become an overnight millionaire your better off playing the lottery. While you can most certainly outperform the market by doing your homework, you win some and lose some. The term high risk, high reward is certainly pertinent here, however high risk and total loss can happen quite easily too. The next step would be to realize there's a difference between high risk, high reward and complete stupidity. I would be weary of penny stocks, realizing because a penny stock trades at a low price does not mean it will go to a higher price in the near future. I myself lost a good amount on a pump and dump scheme quite some time ago. This advice of course has its exceptions. I have made an incredible amount of money on my Sirius XM(NASDAQ:SIRI) investment. I did get in right before earnings on my initial investment and lost money at first, but it has popped a couple times since then and I have since gone quite far into the positive territory. Its one stock I would certainly recommend but be careful on the timing of this investment as it is quite volatile.

     

    Diversify

    The initial investment of several different mutual funds in order to diversity your profile is a very successful strategy. While your goal may be to beat the markets, mutual funds will usually at least perform with the markets, and are much easier and less risky for the risk adverse investors. It is also a quite formidable strategy to build a core portfolio with mutual funds and defensive high dividend paying equities. This strategy is especially good for those saving for retirement or anyone who is not a full time investor or trader, and doesn't have hours to spend each day doing research. This will limit risk for any investor who has a limited amount of cash to allocate to their portfolio, and any investor who can't stomach short term high percentage losses.

     

    Don't try and time the markets

    You think your significant other is irrational at times? Try watching the stock market. Markets may be the most irrational thing in the world. Fear and uncertainty often drives the market many percentage points down over a short period of time, sometimes even if the issue currently has nothing to do with corporate earnings. Perhaps the most successful investor of all time, Warren Buffet, stated, ”We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.” Certainly like I said previously through research and educating yourself you must learn the difference between greed, fear, and just plain stupidity. You must learn to determine what is causing fear in the markets and actual reasons for the market to drop. A fearful market, such as the recent 5% or so dip we had on fear of a Greek default actually created the best week rally in two years once it was settled. Timing stocks is a different story however. For these it is imperative to understand whether a stock is overvalued, undervalued, or fairly valued. A good place to start would be the price/earning ratio and the forward p/e ratio. This can not be the only way used to value the stock because other factors drive into it. For example, if a stock is carried by extreme momentum, it can have a largely overvalued p/e ratio and you can get seriously burned. In general, the lower, the better, but there are always exceptions. Discounts can be because of fears, poor management, economic issues, natural disasters, or a variety of other issues, but are always there for a reason, whether immediate term, short term, long term, or permanently.

    SUMMARY

    While it is physically impossible to explain all the mistakes made by new investors, I hope as a minimum you understand that research, reading, and education are of the utmost importance before even making your first trade. Understanding key financial ratios, investing terminology, financial statements, management, and even your companies products and the future markets they may enter are a good place to start. You must decide your risk appetite and design your portfolio accordingly. Diversification is a key element in any portfolio. You shouldn't have all of your investments in one sector or even all in equities, and always have some cash on hand to make future purchases only rarely should you be in 100%. Investing is quite difficult because a lot of what we do goes against the way a human brain generally works, but yet some is quite similar. Generally if we see an investment go into the red our first instinct is to sell it to prevent yourself from doing more. Don't necessarily pull the trigger too fast as that security may go up in the next day, week, or month. If you make a choice stick with it, you made it for a reason, and most of all remain confident. Everyone is wrong sometimes. The key is to be right more than you are wrong. I hope this provides a foundation for any new investor to trim the amount of mistakes made.

     



    Disclosure: I am long SIRI.
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