Why do so many beginners fail to invest wisely? Warren Buffet explains the most common mistakes
There has never been a better time to start investing. Education opportunities are everywhere, both in the form of books and online guides, stock market news is one click away, and there is no shortage of investment opportunities.
And yet, so many beginners end their investment journey abruptly and realize that their financial future hangs by a thread although they did everything by the book. Investing is a long-term game, so with every move, you make you must think two steps ahead. Although mistakes are inevitable and some things are out of your control, most failures come down to beginner mistakes that could have been avoided.
And who better to learn from about best investment practices than if not from one of the most successful investors in the world, Warren Buffet? Over the years, Buffet has been very open to beginners and shared his experience, including when it comes to traps that can rookies should watch out for.
Making investments you don’t understand
One of the biggest myths about successful investors is that they put their money into every promising business, without having to learn anything about that sector.
However, according to Warren Buffet, a good investor should always invest in familiar fields and he is famous for avoiding the tech sector, which is too unpredictable and dependent on trends. His rule is simple: if you don’t understand the company in 10 minutes, then don’t invest in it.
“I try to buy stock in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
This doesn’t mean that you can only invest in companies that are related to your job. In time, you can perfect your skills and learn about other fields as well but, as a beginner, having poor understanding of a company’s operations can make you susceptible to scams or just the whims of the market.
If a new investment opportunity arises and you don’t know too much what it means, take your time to research it and if it doesn’t make sense, wait for something else.
Taking every news headline seriously
There are dozens of finance news channels and hundreds of online investment magazines that update you on the slightest change in the stock market or the hottest investment opportunities. But this abundance of information can become an impediment if you don’t know how to filter headlines, explains Warren Buffet:
“Because there is so much chatter about markets, the economy, interest rates, price behavior of stocks, etc., some investors believe it is important to listen to pundits – and, worse yet, important to consider acting upon their comments.”
As a beginner trader, reading about industry news is part of your education. Of course you should follow the best stock trading brokers, watch the news, listen to podcasts and tune in to debates, but you shouldn’t take every headline or advice seriously. Don’t act based on the latest buzz because many times, that’s all it is – buzz. Instead, weight and consider every news and don’t panic whenever the media releases shocking headlines.
Not keeping a record of your mistakes
Everyone makes mistakes, including the wealthiest investors in the world. However, what makes the difference between a beginner and a veteran is that a veteran will always keep track of their mistakes, understand why they happened, and stop themselves from doing them again.
Buffet adds that you should live up to your mistakes, acknowledge them, and share your experience with family and colleagues so that they don’t do them either.
It’s very important not to quit either. In the beginning, you may need some time to perfect your strategy and the big hit might not come as soon as you think. If your first trade wasn’t a success, find out what happened and try again, using what you learned.
Being a day trader
Although day trading can be very profitable and it can be perfect for some personalities, Warren Buffet explains that focusing too much on it can affect your long-term game.
For a beginner, day trading can be tricky because constantly buying and selling stocks involves a lot of taxes and commissions and this will lower your returns. And if you don’t have a stable financial situation and you can’t afford these taxes, sooner or later you’ll reach a negative balance. Another disadvantage is that day trading requires perfect timing and you have to make smart decisions under pressure. A veteran is better at handling their emotions and being rational, but as a beginner, you may not have the discipline to do this.
Instead, Buffet advises to make long-term investments and choose stocks that you can hold on to for decades.
Constantly looking for excitement
Movies such as The Wolf of Wall Street or Rogue Trader have glamorized the stock market and made many beginners consider trading. However, reality is different from the movies and Warren Buffet warns beginners that constantly looking for adventure and excitement can lead to some very bad decisions.
Being a successful investor is not about getting rich quickly. In fact, if you try to achieve too much in a very short time, you’ll need the biggest stroke of luck not to fail. Rather than trying to take shortcuts and invest blindly whenever a popular company goes public, you should focus on moderately growing your income in the long run and waiting to see how disruptive industries pan out. There are many examples of companies that received a lot of hype when they came out, but all the interest died within a couple of years because there was no longer a need for their product or their business model was flawed to begin with.
Many times, the best industries to invest in are the boring ones that provide basic products and services: supermarket chains, beverages and medicine. These companies often fly under the radar and don’t get the headlines because they change at a very slow pace, but if you are looking for stability, this is the way to go.