Everyone tells you what would be the right thing to do when starting out in the investment world. Still, none of them talk about the paths that you should avoid to become a good investor.
Living on passive income while taking a late afternoon nap in a cabana facing the beach must be the dream of many people. Indeed investments are the best option for those who wish to make money passively for the rest of their lives. However, some wrong actions can turn this dream into a nightmare and make you lose a lot of money.
Usually, many novice investors go through this at the beginning of their investing journey. This is good because it will prepare the future investor for adverse situations in the investment world. But continuing to make these same mistakes when you are no longer a novice in the area means only one thing: throwing your money away and not getting any return from it.
Investors are still their own worst enemies.
Often succumbing to short-term strategies, such as market timing or performance seeking, many investors show a lack of knowledge and/or ability to exercise the discipline required to capture the benefits that markets can provide over longer time horizons. In short, they often end up reacting to market maturities and diminishing their long-term returns.
According to QAIB, the 2021 reports again showed the same results compared to previous years. As a result, impatient investors continue to lose their money while long-term investors make more money.
“You don’t need to be an expert. You just need to be patient.” — Waren Buffett.
Five Way to be a Terrible Investor
Many gurus and investors worldwide are always trying to tell you what to do and what steps you should follow to succeed in your investments. Still, none of them comment on what you should never do in your investing life. That’s why many people in the financial market are losing money by buying the idea of “the way to be a good investor” but forget that there is the other side of the coin, the steps you should never follow, the “ways to be a terrible investor.”
And according to the world’s most significant investor, Warren Buffett, some ways should be avoided, so you don’t lose money in the financial market.
- Avoid day trades
It may seem like a tempting offer with a high financial return, but this is a trap that many investors fall into. For Warren Buffett, the best investment is the long-term one because when you buy a stock, you are not just acquiring a piece of paper. Still, a fractional part of that company, i.e., with time, tends to be more valued, and consequently, you will be able to earn more.
- Don’t invest in something you don’t understand
The world’s most significant investor warns, don’t make investments in businesses you don’t understand.
According to him, before investing in the stock of any company, he first needs to understand how the company makes money and the main things that will impact the industry in no more than 10 minutes. If this does not happen, he moves on to evaluate another company.
- Diversify your assets
Many investors emphasize the importance of diversifying their assets. In some cases, this actually helps to maintain the balance of their investments. However, Waren Buffett thinks differently. The idea is to create a portfolio of assets where he sees the highest probability of long-term gains.
He also comments that it is essential to diversify assets. Still, moderately, because a reasonable investor believes in the stocks they have bought.
“Diversification is a protection against ignorance. But, unfortunately, it makes very little sense for those who know what they are doing .” — Waren Buffett.
“Broad diversification is only necessary when investors don’t understand what they are doing.” — Waren Buffett.
- Lack of self-confidence
Buffett comments that every investor’s most challenging decision in mind is to trust their own investment decisions. You will always think that others are right and that you are wrong. However, instead, you need to study and believe in yourself.
To succeed, you need to overcome fear and not pay attention to what others are telling you. Accumulating knowledge and making decisions on your own can be the key to freeing you from the rat race and making you a better investor.
- Don’t be a day trader
For Buffett, the key to getting a better investment return is buying a stock and forgetting about it. He believes in having a buy-and-hold mentality and insists on holding stocks for decades.
There are two reasons behind this: (1) if you buy a stock for less than its actual value, the price of the stock will eventually converge with its intrinsic value; and (2) if you buy an excellent business, the value of that business will accumulate and increase exponentially the longer you hold it. Thus, the patient investor will eventually be rewarded if he holds his stock longer. For Buffett, time is an investor’s best friend.
Final Thoughts
Creating a passive income through investments is an arduous task. However, failing to achieve financial independence is more embarrassing and regrettable.
Short-term investment may seem more tempting, but statistically, it proves less advantageous to the investor. That’s why the best tip that Warren Buffett can give us is that we should invest in thinking about the future and not the present.
The magic of compound interest is accurate. It can multiply your capital if you become patient enough to wait the necessary time for this to happen.
“The investment results depend more on the behavior of the investor than on the performance of the fund.” — Dalbar QAIB.
Thanks for reading. Have a great day!