Philippine Stock Exchange. AFP FILE PHOTO
Q: I have just started investing in stocks because my friend encouraged me to buy a hot IPO whose share price went triple in few weeks. I like the idea of making money from stocks but I am also afraid I may lose a lot when the market turns bad. What are the common mistakes in investing that I should avoid?–Genesis Santelices by e-mail
A: In investing, mistakes happen all the time even if you already know the do’s and don’ts of buying and selling stocks.
But knowing the mistakes that other people have made can help you lower risks. As a beginner, it is easy to be swayed by the excitement and fear in the market. You need to be psychologically disciplined when you make your investment decision. You can only do this if you know your principles learned from mistakes.
Have you ever experienced regret, even if you have made profit already, because you saw your stock go up further after you sold it on the same day? You must have realized that it was a mistake. Instead of selling it too early, you thought you should have bought more so you can maximize your profits. Correct?
So the next time you encountered this familiar situation, you would double your position in anticipation that the stock will break out, only to find it falling sharply, wiping out all your earlier gains with losses.
This is one of the most common mistakes investors make when they attempt to time the market. In theory, you can predict where the stock will exactly go after hurdling a particular resistance or support level in the chart, but in reality, this does not always follow.
This is because the stock market is primarily driven by emotions. Market traders and investors react to uncertainties and expectations. You will never know how the stock market will behave tomorrow. You can only have an educated clue on what will probably happen based on the information that has been disclosed to the market.
When you enter the market, make sure you have an investment strategy. What is your risk tolerance? How do you plan to diversify your portfolio? How much should you allocate for blue chips? Should you buy speculative stocks? How long is your holding period per investment? How much loss can you tolerate? How much gain should you target for each stock?
You can use charting as guide to estimate your risk and return by timing when to enter and exit your trade. It is all up to you at what price exactly you want to settle it. If you have a strategy, you should be comfortable with whatever decision you make regardless of the situation in the market because you will always have a plan on what to do next.
Buying a stock based on the opinion of other people is another mistake you should avoid. Listening to your broker’s advice or following social media discussion about how good this stock is and how much its share price should be and so forth are useful sources of information but should not be your sole basis for making decisions. You must validate the stock by doing your own research. What is the probability that the company will achieve its target profit this year? Do you understand the business model of the company? How reliable is the management team in keeping their promises? Does the stock still offer buying opportunity based on its current valuation?
When a stock appeared to be profitable in the past, it would not be hard for it to become your favorite. You may keep buying back the stock at lower prices every time you sell it. You may even have invested a lot of time and effort in studying the company. But if the market fundamentals have changed and you have to sell it, you need to dispose it even at a loss.
It is a common mistake to fall in love with a stock that has become a loser by holding on to it in the hope that it will recover someday. Ideally, if you have a reason to believe the stock will fall deeper, you can cut your losses when the stock has fallen by 10 percent. Taking a loss at this level will give you the ability to recover your losses faster because you only need to earn roughly the same percentage at 10 percent by investing the proceeds in other stocks.
If you are emotionally attached to the stock and you prefer to wait until it recovers to break even, you will risk losing more in the process. For example, if you have already lost by 50 percent, it will take the stock to go up by 100 percent for you to break even.
As a beginner, you might expect that, after you buy the stock, you must make money right away. Some stocks move very fast and some do not. When a stock is more volatile, it doesn’t mean that it is more profitable. It only means that, because it moves in a wider range, it offers more trading opportunities that can give higher returns, but is riskier.
A common mistake is frequent switching of positions from slow moving to fast moving stocks. High turnover of trading using the same capital will simply incur more costs. This may accumulate over time and eventually eat up your profits in the long-term. Being guided by mistakes will help increase your chances in making money from the stock market.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about financial planning, attend our FREE personal talk on July 24, 7 p.m. at PSE Ortigas. To register, e-mail info@rfp.ph or text <name><e-mail><RFPinfo> at 09173464126
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