We have all tried to make mistakes in the stock market – mistakes are a natural part of a learning process.
But that doesn’t mean you should just shrug off your mistakes and repeat them.
You have to look at them and you have to learn from them.
What are the typical mistakes that private investors make?
The typical mistakes are investing without research, selling too early and missing out on a bigger gain, and panic selling at a loss.
The biggest mistake we all fear is investing in something that is too bearish or outright bankrupt.
How do you avoid making mistakes?
Here are five concrete steps you can take:
1. Learn and read financial the news
The best investors are constantly learning and keeping up.
Warren Buffett reads more than 5 hours a day. He says that knowledge accumulates, just as money does. The new thing that you learn, you build on top of something else that you have already learned, and over time you get an exponential learning curve.
What should you read and learn?
You must ensure that you stay up to date on the big news in society and on business news.
You need to read newspapers, listen to investment podcasts, read blog posts like this one, and read investment books.
If you want to be a good investor who buys shares in individual companies, you must also get used to opening and reading financial statements.
2. Research your business and use a checklist
If you invest randomly – perhaps because someone mentions the company – then you will make more wrong investments than if you familiarize yourself with the company before investing.
You have to look at the accounts and you have to examine the product to make sure you understand what is going on in the company.
The best way to make sure you get the most important questions answered about the company and its services and products before you invest is to follow a checklist.
Your checklist should change over time as you gain more experience and discover your weaknesses.
You can borrow my checklist here.
3. Discuss your investments with a good partner
Every year, Warren Buffet holds an auction where you can win a lunch with him and his partner Charlie Munger.
Guy Spier and Monish Pabrai won the 2008 auction for $650,000. One of the best pieces of advice they got back then was just this: to have a partner to bounce ideas off of.
Warren Buffett has long played ball against Charlie Munger before he invested in a company. Guy Spier and Monish Pabrai play off ideas against each other.
Do you have someone with whom you discuss investment ideas? A person who can make you see other sides of a company than the ones you’ve fallen in love with? Someone who can challenge you intellectually?
It doesn’t have to be a single person – it can be several. If you have a group of like-minded people to share your ideas with, this is worth its weight in gold.
4. Reverse your decision at trial
You must – as in a courtroom – hear both sides of the case when you analyze a company.
This means that you must act as a defender and prosecutor at the same company.
First, you go through the company in a fairly neutral way to see if you would invest in it. If you come to a yes, you must bring forward the prosecutor.
Now you need to look for all the reasons you can think of why it is not a good investment. Then you must come up with counterarguments to the negative accusations.
If you need inspiration for the counterarguments, you can google and find those who are shorting the company and see if you have argued their case.