Your Worst Enemy When Investing in Stocks

It’s not your neighbor who once gave you awful advice on a hot stock tip (you’re no longer on speaking terms, unless you need to borrow a power tool).

It’s not one of those “market pros” you read about on CNBC who seemed so sure about this one stock that he called it a no-brainer (you bought the stock and this no-brainer has gone no-where but down).

It’s not the market which always seems to be sizzling until you jump on the bandwagon and then it just crashes (must be some kind of bad luck).

It’s not your parents who tried to teach you to save money; instead, you spent all your money partying in your college days (now, you barely have any money to invest).

Nope, don’t look any further. Your worst enemy when it comes to investing… is the person in the mirror.

If you took a hot stock tip from your neighbor and bought a company you had never heard of and the stock tanked, you’re the only person to blame. The reason you bought the stock based on the tip you accepted was because you were greedy when you heard from the neighbor that the stock he bought went up in price.

If you are a regular visitor on CNBC and buy a stock on a whim because one of those “market pros” recommended the stock, you can only blame yourself. The reason you bought the stock that was recommended was because you wanted a quick gain and you relied on someone’s opinion instead of researching the company yourself.

By the way, you should know that there’s a pretty good chance those market pros already own those stocks they’re recommending and they’re doing some cheerleading. I call it a legal “pump and dump” scheme. It’s similar to those scams where the fraudsters inflate the price of penny stocks artificially through false and misleading information on the internet and sell out at a high price leaving duped investors with penny stocks that plummet in value.

If the market always seems to be crashing after you join the party, don’t blame lady luck. Yep, it’s that person in the mirror again who you need to squarely put the blame on. The reason you jumped on the bandwagon is because you could not stand to see people around you make fast money and you wanted to get your share of the fast cash.

So what’s the point of all this?

The point I’m trying to make is that until you take full responsibility for all, and I mean ALL of your investment decisions, you cannot achieve success in investing.

Successful investors always take responsibility for their actions. They make mistakes but instead of blaming the market or anyone around them, they focus all their energy and efforts on learning from their mistakes so that they can make better investment decisions in the future.

Ultimately, there’s a direct correlation between your investment knowledge and your investment success. You cannot have level 1 investment knowledge and expect level 10 investment results. It would be the same as not being a very handy person but somehow thinking you can completely renovate your kitchen without any help.

Looking back, it’s easy for me to see that when I started investing in my mid-20s, I didn’t know anything about investing. Sure, I had a few killer trades where I pocketed some serious cash in a few days but if I look at my overall returns over the period I traded in and out of stocks, I barely broke even.

I was at level 1, yet somehow I thought I could get level 10 results. Now, I’m at level 8 and getting level 8 results. I keep learning every day; I just can’t wait to get to level 9 and eventually level 10 in the near future.

Becoming a successful investor is not easy, but it is simple. The more you know, the more you grow. The more you learn, the more you earn.

About the Guest Author: Joe’s success in real estate has allowed him to become mortgage-free by the age of 32. Now, his passion for investing is leading him closer than ever to his goal of retiring before 40. Joe firmly believes that life is too short and precious to just “make a living” or have a 9 to 5 job simply to pay the bills. He wants to share with his fellow Canadians everything he has learned in order to help them achieve financial freedom as soon as possible.

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Joe @ SmartCanadianInvestor
11 years ago

Thanks Personal Finance Blog.

You’re right, taking a contrarian approach can really pay off. Interestingly, Warren Buffett has become one of richest persons in the world and is arguably the best investor of all times. Yet, most investors take the opposite approach when they invest (short-term vs long-term, focusing on the market vs the companies, momentum vs value, herd mentality vs independent thinking, etc).

The Personal Finance Blog
11 years ago

Solid post.

I definitely agree with what’s said in the post. Most people want to make money by investing, be it in the stock market, or real estate, or any other vehicle, but they don’t want to put in the work. That’s why they rely on tips from other people or from those so-called experts on financial networks, so that they don’t have to do their homework. Of course, we know how that turns out 99% of the time. You can’t make money by doing what everyone else is doing. If anything, people should use what they see on financial networks as signs of what NOT to do. Warren Buffett put it best: “Be fearful when others are greedy, and greedy when others are fearful”

Matt @ Dividend Monk
11 years ago

Joe,

Thanks for the clarification. We are in agreement.

Joe
11 years ago

The Rat,

You’re right, the average investor is constantly learning. However, it can be difficult at times as many of them can be influenced by what they hear on popular business shows on cable TV. These shows are more catered to speculators and traders than true investors (notice how often they run ads to encourage the average person to become an active trader).

That’s why the key to successful investing is independent thinking. Independent thinking combined with knowledge, partience and the right temperament is the winning formula.

Matt,

You make some great points. In my article re: investment results being in correlation with investment knowledge, what I meant by investment knowledge is not what they teach in Ivy League business schools (efficient market theory) or what institutional investors on Wall Street have.

Investment knowledge in my view is about individuals learning one step at a time how to be a true investor. It’s about buying a stock and becoming a part-owner of a business as opposed to trading stock certificates electronically.

I strongly believe that the individual investor can beat Wall Street but only if they play a different game. If they play Wall Street’s game of chasing short-term gains, it’s virtually impossible and requires a lot of luck. But if they are value investors and have a long-term outlook on the companies they invest in, they can be way ahead of the crowd, including the institutional investors like mutual fund managers, money managers, etc.

Wayne Gretzky once said that the secret to his success is that he doesn’t follow the puck, he anticipates where it’s going to go and he skates there.

Wall Street is constantly looking at where the market will be tomorrow, next week or next month. Successful investors like John Templeton, Peter Lynch, Warren Buffett, etc. are always looking at where the companies they invest in will be in 2, 3, 5 or 10 years.

Ivar Sala
11 years ago

Great post.
Van K. Tharp (trading coach, profiled in Market Wizards) says that trading is 90% psychology and 10% everything else (the system, money management rules, trade execution etc).

Following a trading plan is more difficult that novice investors/traders think. Our cognitive biases i.e. psychological profile, make it so very difficult.
I learned that lesson the hard way.

Matt @ Dividend Monk
11 years ago

Good post. It’s true that almost all investment failures are the fault of the investor. People tend to look at the stock market as some chaotic, wavy ocean of luck, but by understanding the company you’re investing in, it doesn’t have to be chaotic.

I do disagree with one point, though. Investment returns are not directly correlated with investment knowledge, only indirectly correlated. The people that crashed their financial corporations in this economic collapse were Ivy League MBAs, and mutual fund managers with decades of investing experience got thrashed. Why? Greed and irrational expectations.

Instead, personal qualities (backed by a reasonable understanding of investing and math) are the most direct correlation to investment returns, with experience second. Deeply understanding the company you are investing in, having a long-term view, and having rock-solid investment patience trumps investing knowledge any day.

Sure, one does need knowledge, but give me a guy with 3 years of investment knowledge but a true long-term view and patience, and I’ll take him over a guy with 20 years of experience and a less rational personality. I truly believe in the power of individual investors.

The Rat
11 years ago

I think your thread highlights how people learn from their mistakes and the average investor is in a constant state of learning. Just like trying to buy the most recent speculative stock, chasing stocks with high dividend yields can also lead to really bad situations.

Nice post.

Joe
11 years ago

LSI,

Thanks for the compliment. Congrats on your website! At 24, you’re already way ahead of most people as you’re already on solid financial ground in terms of your maturity level and attitude.

You analogy in one of your articles about money being like soldiers working hard for you so that one day you won’t have to work is awesome.

Investing in index funds is also excellent as you’re avoiding the high-cost of actively managed funds and index funds beat over 80% of all mananed funds.

However, I’m hoping you will consider investing in companies directly one day. It all seems like a daunting task at first but it’s really not rocket science. If you’re willing to learn a bit at a time, you’d be amazed at how big your investment knowledge will grow to one day.

Buying an index fund is like buying an entire basket of stocks. As you learn more about investing, you can buy the very best stocks in that basket.

How fast you learn before you get to the “sweet spot” is up to you. It depends on your willingness to learn and the effort you want to put in. That’s why some people are surprised that I succeeded at a young age. But maturity does necessarily come with age; it comes as you grow inside and start living conciously.

I learned a great deal about real estate in my late 20s and learned a great deal about investing in my mid-30s. I was so passionate about learning to invest that I must have read over 50 books.

Perhaps in one of my next articles her at MDJ, I can explain to readers how Warren Buffett does it. His genius is that he uses an approach that is strikingly simple.

I can even show everyone how he does his calculations when he evaluates companies to come up with an intrinsic value (NPV P/E projections, discount cash flow, etc).

Of course, beyond the numbers there is a qualitative analysis that needs to be done as well but in my mind, if an investor cannot put a value on a company, it’s very hard to succeed in investing.

It’s like looking to buy a flat-screen TV but not understanding what is the fair value. How can you get a discount?

dj
11 years ago

Take full responsibility for…mistakes that your broker made

LSI
11 years ago

I’m not really sure why, but my first comment got taken down.

What said however, is that I USED to be my worst enemy. Then I got on track with index funds and have never looked back. I’m not smart enough to follow indivdual stocks so I just stick with the index funds and keep investing.

Great post Joe. I look forward to reading more. Thanks for your insight.