As a dividend investor who derives dividend income regularly from a portfolio of dividend paying stocks, I believe all of us can move towards financial freedom investing in the same. However, many fail to build additional income or grow wealth sustainably over the long-term despite having a sincere desire to move ahead financially.
So, where do we fall short?
In this article, I will list four major mistakes that most people make when attempting to make money from the stock market.
1. Investing without a Plan
First, investing starts with one having an investment plan.
Basically, it has four key elements:
- Your Current Financial Status
- Your Future Financial Goals
- Duration
- Choices of Investment Vehicles and Strategies
An investment plan is likened to one planning a trip. It starts with where you are now, where you want to be, when you intend to reach your destination, and how you intend to get there safely. The subject of investing is confusing but usually this is due to one trying to invest without having a plan beforehand. It is like driving around in circles when investing their money.
This leads to:
2. Investing Becomes a Game of Chance
Today, we have 900+ stocks listed on Bursa Malaysia. Which stocks should you invest in?
Logically, the answer depends on your investment plan as it helps you select stocks that would propel you towards financial success. However, many do not bother to sit down and have their plans crafted as the process seems boring. Thus, how would most people pick their stocks?
- Feel, Guts, and Emotions?
- Colleagues, Friends, or Relatives?
- Stock Tips, Rumours, and Commentaries?
As such, many treat stocks like lottery tickets. They may buy stocks out of hope after having heard of some “exciting news” about them. Many expect the prices of these stocks would go up forever. It is a fallacy as they would soon met with disappointment when their stocks fall in prices. This leads us to:
3. Buy High, Sell Low
Ideally, success in investing revolves around four words: “Buy Low, Sell High”.
However, it is easier said than done. As mentioned, many buy stocks after gaining knowledge of exciting news about them. What is this news usually about? In most cases, they are about stocks that have experienced the highest appreciation in a short span of time. Instead of “Buying Low”, many resort to “Buying High” as they want to join the bandwagon.
Usually, a savvy investor would stay away from such stocks or would have sold their shares at high prices (“Sell High”).
This is a reality of the stock market. Stock prices go up and come down. It is the norm and hence, a savvy investor would have prepared for what to do if his or her investment fell in price. But since most people do not have a plan, they panic when prices drop and “Sell Low” out of fear even though they “Bought High”.
At these times, an investor with know-how would enter the market to accumulate more of these stocks as their prices would be trading at a discount (“Buy Low’).
This brings us to the next question: What gives these investors the guts and confidence to invest in stocks when their stock prices drop?
4. Not Treating Stocks as Businesses
Investing is more intelligent when it is businesslike.
Warren Buffett, the living legend and an example of how one who can amass billions by investing, advised not to speculate the markets.
So, what is the meaning of being “businesslike”? It is one who views stocks as businesses which own assets and generate profits and cash flows from their customers. Thus, an investor would first study, in great length, a stock’s business models, financials, and its future plans for growth. If the stock is fundamentally solid, he proceeds by assessing its stock price and would only commit his capital into it if its prices are relatively cheap. This explains why savvy investors, like Warren Buffett, can be confident on their stock purchases in a bad market.
Regrettably, many do not view shares as certificates of ownership of a business and thus, buy stocks with little knowledge on what businesses they are into and how much money they are making. It is a mistake and the biggest downfall is one who bought into stocks where their businesses are unprofitable.
Think about it. Are they able to grow shareholders’ wealth sustainably over the long term? In short, it does not take a genius or a crystal ball to build a stable and a regular source of income from stock investing. It takes a plan, logic, willingness to learn and a business mindset to profit consistently from the stock market.
This article was written by Ian Tai. Ian can be reach via email [email protected].
