My 3 Major Mistakes On Stock Market for 1 Year
In 2019, I feel like I’m quite waste a lot of money. I just relying on my savings account to store my money but this has limitations. First, I can grab the money from saving accounts quickly and use it to spend anything that I want. Second, I heard that just putting your money to a saving account doesn’t save you to inflation in the future. On the latter point, means the value of the current balance in the bank will be degraded in the future.
I was searching, an investment instrument that suitable for my current economic status and the practicality to do that. After several thought processes, I decided to invest in the stock market. While the information about the stock investment is really massive back then and until now become the factor why I decided to choose this instrument. Other factors may include low capital needed (not as great as real estate), easy to buy (buy it online), and high gain. But the third point is like a double-edged sword. Even though the gain is relatively high, the risk also high. The risks are manageable and avoidable if you know how the stock market work. However, the lack of knowledge and the human’s emotion sometimes which cause us to fall into the disadvantages
In this article, I will elaborate on my three main mistakes that I did during my first year doing investment in the stocks market
Disclaimer: How the systems works, like how to buy stocks or terms that be used may be different from your country as I write it based on the systems that be conducted in my country
1. Too Much Focus on Quick-Growth
This is maybe the warning that I always got before I start doing stock investment. People always say that if you’re doing stock investment, you should take care of the security first instead of huge profit. That’s what I did for my first two months until I routinely see which stocks that took place as top gainer on daily basis.
I see that may be less than 5 stocks that considered as blue-chip stocks that took place in this list, while the rest is stocks that have low capitalization. These stocks can generate more than 10% profit in one day. My mindset was shifting from becoming the investor to become a trader. However, these stocks are really volatile. It can be going up more than10% in one day but the next day, it can be a nightmare. At that time, I was thinking like I should buy now and just sell it when the price starts to fall. But it’s not as simple as that.
As these stocks have a low capitalization and price, the dealer has a huge force to control the price. In the beginning, the dealer will buy certain stocks in a huge amount. As an impact, the price will be increasing significantly, making it look interesting for other traders mostly to buy it. Once the price already rises and the dealer already got a huge profit from it, they will sell those stocks in a huge amount, making the price fall significantly. I always stuck in this condition, too late to sell it, and hope the price will go up again, but never come true.
Lesson learned: Sometimes it’s better to invest in a stock that has low risk and high safety margin even though gives slow and low gain. On the other way, better to gain less rather than lose more.
2. Relying on Ratio Without Knowing the Context of Companies
“When the good stock is undervalued, buy it”
I am too much relying on several ratios especially PBV (Price to Book Value) or PER (Price to Earnings Ratio). I used to believe the stocks with a low PBV or PER got more room to grow in terms of future price. So, the right principle is buying good stocks with the undervalued price. But the tricky question is, Is the company has a low ratio because it is really undervalued or maybe that’s just a matter of not good company. This also occurs reversely, while we also question like is the company really has great performance or really overprice when we see high PBV or PER.
While I got managed some in a good way, but for other stocks, I got trapped for this false judgment. I invest in, let’s say, company A, a fiber cable company that has low PBV and PER and also has slight growth of income. When I saw the price down, I checked the PBV and the number was declining. I assumed that the room of growth became wider. I did average down for this, which the step when you add more investment when the stock price decline to lower your average buying price so when the price becomes higher, you gain more profit. However, the price didn’t even go up, instead, it was just going downhill. So what’s wrong with this?
Lesson learn: There are several factors that work behind this. From this case, I did more analysis, and turns out it give me a framework to value this stock. Is the stock has great capitalization? Is their product is well-known? If they got revenue from a project basis, how many of the projects that they acquired for each year? Is it a great project? So yes, you can use ratio for filtering your stock selection, however you still need to do your homework to know whether is it worth it to invest in a certain stock or not.
3. Too much diversification
I routinely allocate a part of my monthly income to my stock account. At that time, after involved in the stock market for more than 4 months, I prefer to allocate it to new stock instead of my existing stocks. It because I feel like the current price of my existing stocks is already too expensive, so I search for the cheaper one to gain more profit. However, this led me to have more than 8 stocks.
As I tried to have a deeper understanding of fundamental analysis, it can be quite overwhelmed to analyze the number of stocks. Moreover, you need to understand the bigger view of the industry itself. Say, like I have Bank, Mining, Consumer Good stocks. To get the insight into whether your stock has the potential to rise in the future or in your preferred time frame, you need to know the bigger picture view, which is from industry-wise. Every industry works in a different way. Even within the same industry, each business has its own distinctive environment like revenue and expense model, management, and other factors. Means, too many stocks which lead you to the difficulty to keep up with each. Moreover, if you do technical analysis as well, then your homework can be too much.
In a positive way, diversification can minimize your loss risk. However, this will impact reversely for your gain. Imagine that you have 1 or 2 stocks that generate high gain amongst your 10 stocks, which means that your gain can be deducted by the other stocks.
Lesson learn: Right now, I only keep a maximum of 4–5 stocks on my account and try to have 1 or max. 2 stocks for each industry. In the past, I know the banking industry is generating stable and good gain, it leads me to have more than 4 banking stocks on my account. Right now, I just focus on only 1 stock for a certain industry and optimize from that. Besides, I can do analysis in a more focused way.
In conclusion, from these mistakes, I learn a lot like how the stocks market (at least in my country) works. Moreover, with stock investment, I tend to keep up with economic and business news more compare to what I used to do. On the other hand, I also slowly shape the thought process with regards to determine the value and prospect of certain companies.
On the final word, these mistakes help me to have an investment plan in a more proper way.