Silly as a goose.
That’s the only way I can describe myself when I first started out investing in 2008.
I used to think that undervalued stocks means going for stocks with the lowest price-to-earnings (PE) multiple.
And if you invest in companies just because they have the highest dividend yield?
Oh boy.
You are in for a painful ride.
I was trying to grow my wealth in the stock market. I thought it was all about buying low and selling high. Or buy companies paying generous dividends and I just chill while collecting passive income.
Until I discovered how much more powerful it is to invest in Steady Compounders, sit back, and let compounding work.
I still make mistakes, but I’ve been investing since 2008. I’ve sucked in the first couple of years. I suck a little less now.
Here’re the mistakes holding you back:
1) Not studying the cash flow statement
A company can go bankrupt even though it’s profitable.
Yes, you read that right. And it was my finance professor who invested in the bonds of these companies who eventually went bankrupt because their bankers only showed them one side of the story—profitability.
But cash is what pays the bill, not profits.
2) Investing in companies hitting 52-week lows
Guess what. A stock that dropped 80% still can proceed to halve itself.
Just because the stock price has dropped a lot, doesn’t mean that it’s a bargain. Investing is about the future, we must separate the companies facing a temporary hiccup from those that are suffering a structural decline.
Because one of them may recover, the other one will result in destruction.
3) Being distracted by financial news and commentaries
I used to think that these men in suits were providing real investing insights.
It turns out they are just well-dressed comedians. The truth is, bad news sells papers and attracts online clicks. When it comes to attracting your attention, nothing is more powerful than fear.
4) Selling your winners and holding on to your losers
If you sell your winners just because they’re up, it’s like trading away Michael Jordan just because he won too many games.
The legendary investor Peter Lynch refers to this as cutting your flowers and watering your weeds.
If you do this often enough, you will end up with a portfolio full of duds.
5) Investing in companies with high dividend yields
Those stocks with 10% dividend yields? There’s probably a good reason why they’re priced that way.
Often, high dividend yields are a sign that investors are skeptical about a company’s future. It could mean the company is struggling financially or its dividend payout isn’t sustainable. Without considering the underlying reasons, investing solely based on dividend yields can lead to losses and underperformance.
6) Investing in low PE stocks
Low PE doesn’t mean it’s cheap, and high PE doesn’t mean it’s expensive.
Investing is about the future, and we must consider the growth, profitability, and reinvestment potential of a company.
7) Spend hours building the perfect spreadsheet
Being vaguely right is better than being precisely wrong. Most analysts spend hours building their spreadsheet and forecasting every variable because that provides their clients with a false blanket of control.
The story needs to be tied to the numbers. No, a complex model is not necessary.
8) Investing in businesses with a wide but shrinking economic moat
The economic moat of a company is either shrinking or expanding.
Investing in a company just because it has a wide economic moat may result in the next Kodak or Blockbuster, firms that once dominated their respective industries. The trajectory of the moat matters.
9) Not diversifying your portfolio
There are rarely sure things in the stock market, we always have to consider the range of outcomes and not bet the entire farm.
Howard Marks of Oaktree Capital once shared, “I tell my father’s story of the gambler who lost regularly. One day he heard about a race with only one horse in it, so he bet the rent money. Halfway around the track, the horse jumped over the fence and ran away. Invariably things can get worse than people expect. Maybe “worst-case” means “the worst we’ve seen in the past.” But that doesn’t mean things can’t be worse in the future.”
10) Not joining 300+ investors at the Steady Compounding Investing Academy
I just launched the Steady Compounding Investing Academy 2024. It solves all these problems and more. If you’d like to have a clear framework to analyze investment opportunities and compound your wealth in the stock market, you’d love what’s inside.
https://steadycompounding.com/investing-academy/
From now until Monday, you can take advantage of several launch bonuses. In addition, the price will go up at the end of the launch – so now is the best time to buy.
Hope this helped,
Thomas
P.S.
Which mistake stood out to you? Comment down below.
These were painfully learned over the years, so I’m happy to help!