Avoid These Common Investor Mistakes

Physician's Money Digest, January31 2003, Volume 10, Issue 2

Everyone makes mistakes—that's whyerasers were invented. The key is tolearn from mistakes and not make thesame one twice. Unfortunately, when itcomes to investing, too many physician-investorsdon't seem to learn their lessonand make repeated mistakes.

How to Make Money in Stocks

Investor's Business Daily

In the third edition of his best-sellingbook, (McGraw-Hill Trade; $12.95), William J.O'Neil, founder of (800-831-2525; www.investors.com), includesa chapter on the most commonmistakes investors make. The following isa consolidated list of those commoninvestor mistakes:

O'Neil's advice:

•Investing with your emotions —Too many investors stubbornly hold ontosmall losses rather than getting out andcutting their losses short. Their hope isthat the stocks will rebound. Too often,these small losses can become big losses.Cut all losses immediatelywhen a stock falls 7% or 8% below theprice at which it was purchased.

•Buying on the way down —Sure, adeclining stock may seem like a real bargain,but there's usually a reason why it'sdeclining. It's a good idea to avoid tryingto catch a falling star.

•Getting what you pay for —Many investors purchase large amountsof low-priced stocks rather than smalleramounts of higher-priced stocks. In reality,they'd be better off buying 30 or 50shares of a higher-priced and better-performingstock. O'Neil recommends thinkingin terms of the dollars being invested,not simply the number of sharesbeing bought, and purchasing the bestmerchandise available.

•Shooting for easy money —Beforeinvesting, it's critical to do the necessarypreparation and research, as well as toacquire essential skills and discipline.Don't be so fast to risk your hard-earnedmoney on tips, rumors, news events, orother opinions you might hear from supposedmarket experts on television.Instead, take the time to study, learn, andknow for certain the implications of theinvestment decisions you make.

•Focusing on dividends or low price-earnings (P/E) ratios —These elementsare important, but not as importantas earnings per share growth. Often,the more a company pays in dividends theweaker it becomes, because it may haveto pay high interest rates in order toreplenish funds paid out in the form ofdividends. Many times, better-performingcompanies will opt not to pay dividendsand instead reinvest the capital intoresearch and development or other corporateimprovements.

•Going with a household name —Don't purchase a stock just because yourfriend works for the company or thecompany is a household name. RememberEnron and WorldCom? Anddon't pick favorite companies and thencross your fingers. Many of the betterinvestments might be newer companiesthat you're not familiar with. Do yourresearch, and if the company appearsfavorable in light of earnings, salesgrowth, and return on equity, only thenmight it be worthwhile.

•Worrying excessively about taxes and commissions —Focusing toomuch on taxes and the commissions associatedwith buying and selling stocks canlead to poor investment decisions. Forexample, some investors allow a goodprofit to slip away because they're preoccupiedwith trying to achieve a long-termcapital gain. In addition, the commissionsyou might pay to online brokersare small compared with the money youcould earn by making the right investmentdecision in the first place. Focusmore on the bigger picture.

•Failing to develop a plan —Notenough can be said about the importanceof having a plan. Too many investors onlydo half their homework. They focus onbuying stocks, but have no plan in placefor selling stocks. It's equally important tounderstand when or under what conditionsa particular stock should be sold.Without these guidelines—a set of strictprinciples or buy and sell rules—investorscan be left with uncertainty. And that canlead to investing mistakes.