It is both easy and hard to make a kill out of your investment as an investor. Investing is a game of cards that should be played with a lot of caution. A simple mistake and you lose your time and money, thereby sinking deeper than you were starting off. You should, therefore, exercise caution when choosing your investments. Here are a few mistakes most investors make.
Comparing investing to gambling
It is arguable that investors make investing decisions just the way gamblers make gambling decisions. With the erratic movement of stock prices, for example, you never know which company will be doing good tomorrow. An investment may be very promising today, but tomorrow, it may be nullified by the legal system. Indeed,
to some people, there could be some truth that investing is more or less similar to gambling. Indeed, with investing, there may be no internationally accepted formula for choosing the most worthwhile investment at a certain time.
However, there are internationally accepted formulas for valuing investments. You can, therefore, be able to predict the expected cash flows of a certain investment accurately and determine its value at the outset. This is different in gambling where you just pick your choices and cross your fingers, unable to know what to expect.
Choosing investments based on emotions
Most investors choose the investments that they have emotional attachments to. For instance, most investors tend to buy shares of the companies that they like for one reason or the other. Often, this is done at the expense of a more worthwhile investment in other companies that the investors do not like. Investors should be guided by the ability of a certain investment to create value for them.
Judging a book by its cover
The finance world is full of window dressing. The fact that a company is making profits year in year out does not mean that it is the best company to invest in, for example. Ask yourself- does the company declare dividends? If it does, what is the dividend payout ratio? What are the earnings per share? Research has shown that investors react to the good news by increasing their investments in a certain company. This is not always the right move. Good news may mean bad news shortly. Instead of taking information concerning a certain investment at face value, it is advisable to do thorough research and establish facts that will help you make a sound judgment.
Following the crowd
Most people invest where everyone else has invested in. For example, everyone desires to own a good house. That is why everyone wants to invest in the real estate sector. While it may still be beneficial to follow the crowd, sometimes it may be very destabilizing financially. We all know that the world economic crisis in 2008 was fueled by the excessive demand for mortgages. Everyone wanted to own a house and mortgage lenders were willing and able to lend. What happened? Everyone followed the crowd, the rate of default was very high, and the effects ballooned to destabilize the entire real estate industry and the world economy in general.
Putting all the eggs in one basket
Most investors invest all their wealth in one form of investment. When that investment collapses, they become financially unstable. As a prudent investor, you should diversify your investments. Create portfolios which, according to your judgment, will generate the highest returns on investment. If one portfolio fails, the others will work. With well-diversified portfolios, the probability of positive returns on investment is always high.