The Expensive Education of Investing By Jeff Havenstein, analyst, Retirement Millionaire
I still remember the first stock I ever bought... I was 22 years old, fresh out of college, and I plopped a few hundred bucks into a brokerage account. I was eager to buy my first stock, but also nervous. I had heard about all the money you could make in the stock market... and the investing horror stories following the financial crisis. When it came time to choose a stock to buy, I did what a lot of novice investors do: I went to Google and searched "tech stock that will double." (Chances are, if you're reading this right now, you're probably guilty of this, too.) That led me to a company called Himax Technologies (HIMX). If you've never heard of Himax Technologies, you're not alone. Today, the Taiwanese semiconductor company has a market cap just over $1 billion. At the time, I barely knew anything about the company. But I was caught up in the promises of 100% returns in just a few months. "Easy gains," I thought. "Sign me up." You won't be surprised to hear it didn't double. I sold it a little while later for a not-exactly-life-changing profit of $11 (after fees). If I still held HIMX, I'd be sitting on a loss. Lesson learned...
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From then on, I told myself that I would only buy companies that I knew and could understand. This is something that every investor should do. And it's something that my colleague Dr. David "Doc" Eifrig preaches all the time. When you can't describe how the company operates or how it makes money to a friend, the stock is probably not for you. Buying a Taiwanese semiconductor company was my first big investing mistake. I've made others, too... I made the mistakes of not diversifying properly and not using proper position sizing. And – like ALL investors – I've made the mistake of selling great stocks too early. Everybody has missteps early in their investing careers. It's an expensive tuition, but it's how we all learn. Selling too early isn't limited to novices, though... Even the most experienced investors do this all the time. We're all human, after all. And we do this because of something called "loss aversion." Loss aversion is the idea that losses have a larger psychological impact than gains of the same size. You see, once a stock has gone up in value, human nature compels us to "lock in" our gains. We think that one of two things can happen after a stock goes on a solid run... Either the stock continues to march higher and your profits will continue to grow, or the stock could start to head lower and you'll lose those gains – possibly even turning your winning position into a loss. The mind's desire to avoid the possibility of a future loss leads many people to sell great stocks too early – even if they are still bullish on the stock. This is painful for me to bring up, but I have my own example of selling too early. I'm still gritting my teeth about selling cloud-communications company Twilio (TWLO) too soon. I can't remember exactly why I sold, but I know it wasn't because my outlook for the company changed. If I simply held on, I'd be up 1,000% today. Maybe your big regret was selling a stock like Amazon (AMZN) or Apple (AAPL) too early. Like I said, even the most experienced investors can make this mistake. Selling too early – or selling a loser too late – is much more common than you think. You have to be disciplined if you want to avoid doing this. Remind yourself each day why you bought the stock in the first place. If the story still makes sense, you should continue to hold. But if the story changes for the worse, it's time to sell. You could be the greatest stock-picker in the world... But your returns will suffer if you consistently choose the wrong time to sell. Don't make that mistake. Here's to our health, wealth, and a great retirement, Jeff Havenstein with Dr. David Eifrig Editor's note: After the craziest stock market year ever, you might be afraid that the biggest gains are behind us. Don't worry... To help you come out on top in 2021, Steve, Doc, and Austin Root are sharing their candid thoughts on where the market could go next, as well as their No. 1 stock picks for the year. Join us online on January 26 at 8 p.m. Eastern time to hear the full discussion... You can RSVP right here. | Further Reading You might be tempted to sell your stocks now while they're at all-time highs. But the market keeps showing us that even higher highs are always possible. In fact, there's precedent for crazier gains from here... Get the full story here: Why the 'Groundhog Day' Trap Could Ruin Your Investments. The Melt Up is here. That means that stocks will most likely soar to never-before-seen valuations. But it also means the stock market "Melt Down" is just around the corner. Be sure you know how to capture the biggest gains while protecting yourself from losses... Read Steve's two-part essay here and here. |
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