I’ve been there – thinking that you just made the greatest trade ever, only to find out you made a total mistake. It happens, and it makes you feel dumb. Here are some of the dumbest trading mistakes that you can make, so pay attention and avoid feeling stupid later on.
Remember, trading is different than investing. Some of these don’t really apply if you’re an investor. Keep that in mind as you read these.
1. Always Using Market Orders
Lesson #1 – use limit orders when possible. Market orders can be good if you need to get out of a position immediately. But they can make you feel dumb when you suddenly don’t realize the profit you thought you had. Here’s my example: I had wanted to sell a stock for a nice $10 per share profit. I put a market order in before work, and when I got home, I opened the trade confirmation… Guess what, my profit was only about $5 per share. What happened? The price fluctuated a bunch during the day and I got very poor pricing. (Remember the things you should do after you place a stock trade).
If I had just used a limit order, I could have been somewhat sure in the price I would have received for selling, and booked much higher profits. Don’t get caught off guard – use limit order.
2. Letting Losses Run
Ever felt like you just had a sure thing? I know I have. I had invested in a biotech company that I was sure was going to either be purchased by a large pharmaceutical company or was going to get it’s #1 product through Stage 3 Clinical Trials. Well, none of that was panning out after months of holding the stock. Meanwhile, the company was bleeding cash and nothing was changing. I just sat idly by watching the stock price sink about 70% from where I had bought it.
Instead of letting losses run, set goals and develop an investing plan. Put a target amount – say 20%, and if the stock drops below that, sell. Taking the emotion out of it will help you prevent losses from running and avoid this simple trading mistake.
3. Being Greedy
Along the same lines of letting losses run, being greedy is another trading mistake that can leave you feeling dumb. Just think about that stock that went from $50 to $75. That’s a nice 50% gain, but you’re sure it will continue to rise. Instead of locking in some profits, you just keep on letting it be. But 3 months later, the stock is back down to $55 per share. While a 10% gain is nothing to scoff at, it isn’t 50%, and you’ll be kicking yourself after that.
This is another area where an investment plan can be very useful. Setting a target where you lock in some of your profits can help you net more, while still playing your “hunch”. If you had 100 shares, and sold 50 of them for a $25 gain, and the remaining 50 for a $10 gain, you net $1,750. However, if you sold all 100 for a $10 gain, you only net $1,000. It can be wise to lock in profits, even if you still have faith in the stock.
4. Buying Hype
Anyone remember Pets.com? This was going to be the company that revolutionized the way we all buy pet products… It even had an awesome Superbowl commercial. There was a ton of hype surrounding this company, and it only lasted a few months before going bankrupt. Just because there is something overall that is revolutionizing the world (at that time it was online orders), you need to make sure that the business still has fundamentals.
A good example today is Snapchat. This is the current Internet darling. The company lets users send photos to each other, which only last for 10 seconds. While there are a lot of potential uses for the underlying software, their user base is in sending scandalous photos. So, would you invest in this company? Well, a venture capital firm (Benchmark) just invested $8 million in Snapchat, valuing it at $50 million. This company has no revenue – just a novel product.
The bottom line is that you shouldn’t invest because of hype. You need to do due diligence on any company you invest in, and fully understand how the company makes money, and how you will be rewarded as a shareholder.
5. Blindly Following TV Brokers
Finally, if you watch CNBC, you know that everyday during market hours, all the TV pundits do is make calls on the market. Dozens of calls per hour. Some of the most famous, like Jim Cramer, have their own shows dedicated to them philosophizing on the market and answering caller questions on individual stocks.
But here’s the kicker. If you were to follow all of Jim Cramers calls, you would have underperformed the S&P 500 by over 400 basis points on an annualized basis. Only 47% of all his calls over time have outperformed the S&P500. And he’s not the only one. There’s actually a website called Pundit Tracker where you can see the performance of over 150 pundits and their calls. Not only do they track their performance, they also grade them.
Once again, before making any trade, you should have personally done your homework, and not just bought into a company because a pundit told you to do it. Blindly following a pundit will just leave you feeling dumb when you don’t realize the return you expect.
What trading mistakes have you made that left you feeling dumb?
John S @ Frugal Rules says
February 20, 2013 at 5:06 amGreat post Robert! I was definitely guilty of #2 and #3 as a immature investor. Heck, I am still guilty of #3 from time to time. This is exactly why having an investment plan is so vital to an investor as it can help separate those emotions so you can make rational decisions that will save/make you money. I could not agree more on limit orders. It always amazed me when I’d talk with retail investors the number of them had no clue about them and simply would not use them. Generally, I think they are the way to go unless timing is of the essence.
Robert Farrington says
February 20, 2013 at 10:20 amLimit orders are the way to go because so many trades can happen in the fraction of a second. Think about the flash crash – these computers can manipulate everything so quickly, that if you don’t have some safeguards on price, you could be in trouble.
MakintheBacon$ says
February 20, 2013 at 6:24 amI still consider myself to be a rookie investor but I have learned from a few of my mistakes. When I was brand spanking new, I didn’t research on stocks and blindly bought it. Luckily they were a good buy, and have provided me with dividend income, but I now know to research the company and its performance history. Another one was only doing small trades here and there and paying the same commission price all the time.
I currently only do market orders, but after reading this and a couple of other posts on limit orders, I will now only do limit orders when buying.
Lauren @ L Bee and the Money Tree says
February 20, 2013 at 6:49 amThank you for clarifying the market/limit order thing for me-I’d been wondering about that! Wheee! Knowledge!
Average Joe says
February 20, 2013 at 7:06 amGreat piece. My biggest trading mistakes? Although I routinely would tell clients not to do this, I “diversified” an investment into the competitor. Then, when the whole sector went down, I got absolutely no benefit from my “diversification.” Absolutely stupid.
While I agree with limit orders to sell, I prefer market orders to buy. I have no idea where the market is going tomorrow, and if I think it’s going to go up, why not buy it at the current price than risk losing the position? If I’m unsure but really like the position, I may buy an option instead.
Robert Farrington says
February 20, 2013 at 10:22 amGreat point about diversification. Not quite trading, but definitely an investing mistake. It’s very interesting how whole sectors will move up and down based on the news of one company.
William Cowie says
February 20, 2013 at 8:39 amGreat post, Robert. #2 is my achilles heel, but I watch myself now. I put in stop loss orders on a regular basis. It’s not a cure-all, because they’ve often been “tripped” when a stock goes through higher than normal volatility. But the benefit is that forces me to ask myself the question anew: do I really believe this stock is going to do what I thought it would?
Because of this, I’ve devised a trick in my mind: every morning I liquidate my entire portfolio in my head. Then, with all cash, I ask myself: what’s the best investment(s) for the next year or two? If the answer is “what I have,” or close to it, I hang tight. If it’s not, I pour myself a fresh cup of coffee and start looking deeper into what I should be doing. I don’t make many changes, but this discipline helps me against the nefarious #2.
Robert Farrington says
February 20, 2013 at 10:24 amThat’s a great strategy, and I do something similar – just not daily. I like to take a clean slate and see if my portfolio is still what I want it to be. I’ve also had some companies go through spin-offs and mergers, and I have to ask myself if the new company is something that I truly believe in as well.
Robert Farrington says
February 20, 2013 at 10:18 amThat’s a great point. While these mistakes can make you feel dumb when you do them, they do help you mature as an investor. Expensive lessons learned…
Brick By Brick Investing | Marvin says
February 21, 2013 at 5:49 pmI have come here to confess!! I’ve been guilty of all 5 earlier in my investment career. Great write up on mistakes to avoid, however in my experience investors need to feel the pains of these mistakes before they stay away from them completely. Better to learn on a small scale early on in your investment career than on a larger scale later on.
JW @ AllThingsFinance says
February 21, 2013 at 10:10 pmIt’s always hard to sell when you’ve lost money, so to assist with #2, I always place stop orders on my positions. Whether it’s a trailing stop or a stop on quote, doing so takes the emotion out of the trade.
Cody @ Samurai Trading Academy says
February 23, 2013 at 1:10 pmAs has been mentioned in the comments above, having stop losses is absolutely essential to trading successfully. If you haven’t planned out in advance exactly what you’re going to do if price comes against you then you will be no doubt kill off a good chunk of your account.
So #2 is pretty easy to manage with a stop loss but #3 is the hardest part of trading for sure. There is a fine balance between just being greedy and allowing trades to run when you should and it can take a fair bit of experience to learn that. In many cases the fear of missing out on a small win and having it come back on you causes someone to take profits only for price to continue on without so much as slowing down. So you’re right that banking profits as you go can be a good idea for many.
In the end it mostly comes down to planning. If you plan well for what you will do when things are going your way and also when they don’t then you can far more easily manage fear and greed in your trading and avoid many of the common trading mistakes.
jake says
February 24, 2013 at 3:20 amHi
Please allow me to elaborate on the topic of trading/investing errors because I just may be the expert on this since I’ve made so many mistakes, over and over again. In fact, I keep track of my mistakes hoping I would learn from them, but mostly, unfortunately, I’m quite stubborn and tend to repeat them.
There are two kinds of mistakes; knowledge based and psychologically based. I will not comment on the knowledge based errors (such as using market orders instead of limit orders, following talking error opinions, etc.). Knowledge based errors are easy to spot and easy to cure. Just learn more, get more facts and experience. But the really difficult errors and very hard to solve are psychological errors.
First off, I believe nearly all mistakes are made from one single source. That is, all trading/investing mistakes are made from one basic rudimentary psychological problem that WE ARE share as human beings and that is: FEAR.
FEAR of; being wrong, losing money, being too greedy, feeling incompetent, not beating the index, being stupid, being late on an entry, being late on the exit, not big enough position, not small enough on a position, picking the wrong stock, not holding on long enough, missing out on the big one, not being perfect,…etc.
I believe that if the trader/investor could cure the fear that is naturally in all of us and trade from the mental position of NOT CARING how the trade turns out, NOT CARING about the outcome, NOT CARING about results. To be honest in saying out loud; “I don’t care how this trade turns out, profit or loss, not important, and I don’t care what my opinion is about my competency, I’m just going to take this trade and follow my plan regardless of my fears”.
If you can learn to trade without fear of the outcome, without any judgement of yourself or the markets, as if today is the last day you will be alive and the devil be damned…it is a very powerful position and for me, my trading improved immensely when I taught myself how to take the drama out of the trade and trade from a feeling of flow and carelessness of outcome.
Jake
Buck Inspire says
February 28, 2013 at 11:10 amTerrific advice! I’m guilty of the first four. Thankfully I don’t listen to pundits much. But if investors could control themselves from the first four mistakes, portfolios will be much better off. I’ve had my share of market order misses, letting losses run, being greedy, and buying hype. Thanks for helping me face my worst trading mistakes!