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Author: someicg Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 27657  
Subject: Learn from my mistakes: 1 year of investing Date: 9/8/2005 7:18 PM
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Today marks the one year anniversary of my delving into the stock market. While I haven't done as terribly as some horror stories I've heard, I have not done particularly wonderfully either. I am up .8%. Yes, there is a decimal point in front of the number.
To mark the occasion, I will attempt to help out other new investors. That's right, I'm coming clean and will admit to the mistakes I have made in my first year. But rather than just admitting to my mistakes, I will attempt to also relay what I “should have done”. A word of caution, though: I am still a newbie and all advice should be taken with that in mind.

Mistake #1: I forgot about commissions.

The Problem: That's right, I forgot about commissions. This will be a recurring theme throughout most of the remainder of my problems. Including commissions, I made a .8% profit. If you exclude commissions paid, I made 8.2% profit. (Notice the change in the placement of the decimal point.) Yes, commissions killed me.

The Solutions: More detail will be given in this regard in future “solutions”, but for now I'll just give these 2 quick points:
1) put larger sums into each position so that the % of the commission is smaller
2) know your investment strategy before you start putting in real money


Mistake #2: I didn't have an investment strategy

The Problem: Okay, technically, I suppose I did have an investment strategy—I sought to first diversify and second find the best companies that I could. That doesn't sound too bad on paper, but I really had no idea what I was doing. (More on the diversification later.) In the past year, I have dramatically changed my mind as to what is a “good company”. As I figured out what were actually good companies (thanks in large part to the Motley Fool) I came to realize that some of my companies were actually bad, and I parted company with them. This, of course, cost money in commission fees. (See mistake #1.)

The solutions: I think this two step process can help other newbies.
1) Develop a six-month mock portfolio. These are easy to set up. There are all sorts of sites that do it. I personally use Yahoo!. What you do is simple. Create a portfolio and act as if your money was actually in it. This will help you develop your strategies, figure out what mistakes you tend to make, and just see how the market works in general. So, what do you do with the money you were going to invest? Put it in a six-month cd. That way you will at least be assured to make some interest.
2) Consider a variety of strategies before investing. Perhaps setting up a mock portfolio for each strategy just to see how each acts. The Motley Fool has advocates for a variety of strategies and you can pick the brains of people on the discussion boards for ideas. Each newsletter also has a different investing strategy, so there is another option. Take advantage of their 30-day free trials. (For the record, I do not work for the Motley Fool nor do I expect to receive any compensation for this plug. It just seems like a good idea.) When your six-month “mock investing” period ends you should have a better idea of what investing strategy you prefer.

Mistake #3: I forgot to consider personal values

The Problem: Yes, I have a conscience. As I learned more about the companies I already owned, I was aghast to find out what some of them were doing. In essence, I owned (small) parts of companies that were doing things I was strongly opposed to. I sold them. I paid commissions.

The Solutions: Know the company you are investing in well before you invest in it. (Or, don't develop a conscience….Actually, learning thoroughly about the companies is good anyway for other reasons.)

Mistake #4: I was impatient

The Problem: I, like many newbies, saw a 5% drop in one day of a stock and freaked out. This cost me. One of the companies I ended up re-investing in, but when you include commissions, I have just barely broken even despite the company doing well overall.

The Solutions: 1) With your mock portfolio, set up another one that is specifically for companies that you sold. Every time you sell stock, move that stock from your “own” portfolio to your “sold” portfolio. This will force you to look at your buying habits and give you a realistic idea of whether you are making good selling decisions. 2) Know what you are buying in the first place. If you invest in a solid company and it has some bad news, you will know if the bad new changes the reason you bought in the first place. For example, if your company has a history with asbestos, you can realize ahead of time that there likely will be some asbestos charges. That will bring down the eps and likely the share value. But, if you already took that into consideration, you will not be so eager to sell off your shares.

Mistake #5: I didn't pay adequate attention to the larger market

The Problem: I made a couple stupid decisions which I wouldn't have made if I had been paying attention to news indirectly affecting the company. To be slightly more specific without naming names, I owned an auto parts maker that looked solid on paper. I bought in two weeks before Ford and GM tumbled. As you can imagine, so did my stock.

Solutions: I think there are two obvious points to be made here:
1) Diversify. First, looking at diversification. Although I thought I was doing this well, I wasn't. I had 5 stocks that could somehow be traced to the auto industry. Thankfully, only one tanked on me. When figuring out how to diversify, don't simply look at specific industry, but how the various companies relate to each other. I owned an auto parts manufacturer, a bus/rv manufacturer, a dealership, and an insurance company that had a high % of auto policies. Those are not diversified, even if it consists of 2 manufacturers, one service, and one financial. Now, as a caveat, I don't think it's smart for newbies to do the 6-8 stocks and claim to be diversified. We really don't know what we're doing yet. One stock tanks and there goes 12% of the portfolio. If we are not as diversified as we think we are, it could be a lot worse. On the other hand, there is a balance here. You don't want to immediately invest in 15 companies if you only have $1200 to put in the market (see mistake #1). I would suggest perhaps trickling in, buying one or two stocks at a time with the goal of a broader, more diversified portfolio.
2) Pay attention to broader economic trends. This could be as simple as reading the business section of the local newspaper. As you see stories, think to yourself, “Self, what impact might this have on the companies I own or am thinking about owning?” This could save you a lot of money.

Mistake #6: I occasionally had a day-trader mentality without the money to be one.

The Problem: No, I never tried day-trading. However, I did think like one at times. For example, I knew one company was expecting a large government contract. I also expected the stock to shoot upward when that happened, at which point I would sell. Things happened exactly as I expected. But, after commissions (see a theme here?), I made a whopping $26. I didn't put in enough money in the first place to be rewarded for my foresight. (Incidentally, my uncle who loves my “hot stock tips”, did make a killing on this particular company.)

Solution: Don't act like this unless you have the money to back it up. Not only do you have to pay for commissions, but it is highly speculative. You could also lose the money altogether.


This has been my first anniversary “mistakes I have made” lesson. I will probably have many more years of opportunities to write things like this, but I am learning. I do see progress. I am getting better at this stuff. My sincere hope is that my lessons learned will help out some fellow newbie out there to not make some of the mistakes I have made.
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