To ensure, you don’t find yourself in a modern-day rendition of Stephen King’s IT, here are three investing nightmares we should all try to avoid.
1. Averaging down on a loser
One of the worst things we can do as an investor is to throw “good money after bad”. Literally. But that’s exactly what you’d be doing if you continue to buy a company with deteriorating fundamentals.
That’s because those fundamentals matter. If the blip is temporary, then that could be a buying opportunity for long-term investors.
However, if the fall in revenue and profits is a structural issue, then adding money to a sinking hole is a bad idea.
Some great examples of this phenomenon in action have been investors who have continued to add to supposedly “solid” names such as tobacco producer Altria Group (NYSE: MO) or oil giant Exxon Mobil Corporation (NYSE: XOM).
Over the past five years, share prices of both companies are down over 20% while the broader S&P 500 has increased by 115.1%.
Realising if, and why, a business is on the way down is a crucial step towards both growing (and preserving) your wealth.
2. Selling winners too early
Speaking of winners, Tesla Inc (NASDAQ: TSLA) saw its market capitalisation surpass US$1 trillion earlier this week.
As has been pointed out since then, that makes Elon Musk’s stake in Tesla worth more than the whole of Exxon Mobil.
Yet early investors in Tesla, who may have sold out when it was US$50, or even US$100, are probably picturing themselves in an investment version of Wes Craven’s classic horror film Scream.
That’s because that’s exactly what they’d be doing in regret having seen the share price rise to over US$1,000 today.
As is always mentioned when we do invest, buying a stock for the long term means there is no limit to the potential upside to your investment.
That’s because a stock, such as Tesla, can rise 1,000%, 3,000% or even 10,000% or more over time.
Tim, based in Singapore but from Hong Kong, caught the investing bug as a teenager and is a passionate advocate of responsible long-term investing as a great way to build wealth.
He has worked in various content roles at Schroders and the Motley Fool, with a focus on Asian stocks, but believes in buying great businesses – wherever they may be. He is also a certified SGX Academy Trainer.
In his spare time, Tim enjoys running after his two young sons, playing football and practicing yoga.