One of Warren Buffett’s great pieces of advice is to observe the mistakes that others make and avoid repeating them. This wisdom applies perfectly when it comes to investing in the stock market. Buffett has also stated that an investor only needs to do a few things well, as long as they avoid making major mistakes. Avoiding these mistakes is crucial when starting to invest in the stock market. In this article, I want to share five mistakes I personally made when I first began investing, so you can learn from them and not repeat them.
1. Concentrating the Portfolio
The first mistake I made was concentrating my portfolio in just a few stocks. This is a common error, especially when you're starting to invest. Investing in only one or two stocks represents an unnecessary risk. If something were to happen to the company we’ve invested in, we could lose a significant portion of our investment. For example, if we have a portfolio with ten stocks, each weighing 10%, and one of those companies faces a serious problem, the maximum we can lose is 10% of the total portfolio value.
For this reason, diversification is essential. We should never put all our eggs in one basket. Diversification can be done both sectorially and geographically. Investing in companies from different sectors (electricity, industrial, pharmaceutical, technology, etc.) helps mitigate risks, especially if a certain sector falls into a crisis. Moreover, we can also diversify over time to avoid investing everything at once, reducing the risk of facing sharp drops right after making our investment. Investing in companies from different countries is another smart way to diversify, as concentrating investments in a single country may mean that problems in that country could negatively affect our portfolio.
However, it is important not to fall into the mistake of buying more stocks just to be more diversified. Purchasing stocks without analyzing their quality only reduces the overall quality of our portfolio. Top investors like Bill Ackman, Warren Buffett, Charlie Munger, and others agree that once we have reached an adequate number of stocks in our portfolio (around 10-15), adding more stocks doesn’t significantly reduce risks and can end up diminishing the overall quality of the portfolio. Therefore, the key is to diversify but in a coherent way and only if the investments are of good quality.
2. Not Having a Clear Investment Method
The second mistake is not having a clearly defined investment method. There are many investment methods, some better than others, which can be used for different time horizons and types of assets, such as funds, ETFs, or stocks. What is common among the most successful investors is that they all follow a clear and consistent method. If we don’t have a plan, it is easy to lose our way, trying different strategies at random without a clear direction, which generally does not yield good results.
From personal experience, I can tell you that this was one of my biggest mistakes when I started. To avoid this, I suggest you follow these three steps to define an investment method:
Define your objectives: Whether it's achieving financial freedom, making a profit from your savings, or any other goal.
Choose a method that helps you reach those objectives: A three-year time frame could be suitable to test if the method works.
Apply the method rigorously: Nothing is more important than consistently following the plan. If your strategy, for example, is based on fundamental analysis of companies, you must stick to it and apply it rigorously.
Value investing, for example, is a method used by renowned investors like Warren Buffett and Charlie Munger. This method involves buying stocks of companies whose intrinsic value is higher than their market price, analyzing their assets, cash flows, and future growth prospects in detail.
3. Choosing the Wrong Broker or Investing with High Commissions
Another mistake I made was choosing an inappropriate broker. At the beginning, I used my bank to invest, which seemed like a safe option, but the commissions were high. It is crucial to be careful when selecting a broker, especially if it is unregistered or lacks licenses to operate in our country, or if it is registered in tax havens. We should also be cautious with newly established brokers, as they may pose additional risks.
A recognized broker with a good track record, and one that is registered in the country where you reside, is the best option to avoid security problems when depositing or withdrawing money.
4. Thinking a Stock is Cheap Just Because It Has Fallen in Price
The fourth mistake is thinking a stock is cheap just because its price has dropped. When I started investing, I fell into this trap. The intrinsic value of a company is what truly matters, not the market price. Price is what we pay for a stock, but value is what it actually represents. A stock may drop in price without any reason, which could make it a buying opportunity. However, a stock can also fall because it was overvalued, meaning its price was much higher than its true value.
Let’s take the example of Abengoa, a company that traded at 36 euros in 2015. At 3 euros, many thought the company was cheap, but in reality, it was on the verge of bankruptcy, and its price continued to fall, eventually reaching just 40 cents. In the end, the company was delisted, and many investors lost almost their entire investment. This situation shows the importance of not buying simply because a stock has dropped in price; it’s necessary to analyze the reasons behind the drop.
5. Treating the Stock Market Like a Casino
The last mistake I made was treating the stock market like a casino, not knowing clearly what business I was buying into. If we buy a stock without understanding what the company represents, it's similar to gambling. If we buy a stock simply because its name sounds attractive or because it has gone up in price without understanding why, we are investing randomly. In this case, the outcome will be unpredictable, and it’s likely we will end up losing money.
In investing, there is no room for luck. It is crucial to know exactly what company we are buying, at what price, and how much that business is truly worth. If we follow a clear criterion and base our decisions on solid analysis, the chances of success increase significantly.
Conclusion
Avoiding these five fundamental mistakes is essential when starting to invest in the stock market. Diversifying, having a clear method, choosing the right broker, understanding the real value of stocks, and not treating the stock market like a game of chance are key principles that will help you improve your results. The key is to invest intelligently and carefully, always with a well-defined strategy.
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Disclaimer: The content of this article is for informational purposes only and does not constitute financial advice, investment recommendations, or a suggestion to buy or sell assets. Cryptocurrencies and digital assets are highly volatile and may involve significant risks. Always conduct your own research (DYOR) and consult with a professional financial advisor before making investment decisions. The author and the website are not responsible for any loss or damage that may arise from investments based on the information provided.
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