Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 470

If you are new to investing, avoid these 10 common mistakes

I see new investors making the same mistakes again and again. New investors should focus on avoiding big mistakes, not on being brilliant. Here are 10 common mistakes of the uninitiated:

1: Short-term mentality

New investors are easily fooled by market randomness. Stock UP this week? “I’m a genius.” Stock DOWN this week? “Investing is impossible.” Experienced investors know that stock returns should be measured in years, not days.

2: Going 'all in' on one stock

New investors focus on the upside. They become convinced that they can’t lose and over-allocate to a single position. Experienced investors diversify, knowing that the future is uncertain and that no stock is guaranteed to succeed

3: Not doing any research

New investors buy stocks without doing enough research. Many don’t even know how to do the research. Without research, you don’t have conviction. Without conviction, you won’t have the strength to hold through the inevitable downturn.

4: Not taking care of their personal finances

New investors think that buying stocks will fix their personal finances. They quickly learn that stocks are volatile and handling that volatility is hard. Experienced investors make their personal finances rock-solid first.

(Note for Australian readers: 401 (k), HSA and IRA are roughly equivalent to our superannuation accounts).

5: Watching the stock, not the business

New investors focus intensely on minute-by-minute price movements. Experience investors focus intensely on company earnings reports and their estimate of the company's intrinsic value.

6: Selling winners to buy losers

New investors sell their winners and double-down on their losers. Experienced investors know that the opposite strategy is much more effective.

7: Overconfidence

New investors are filled with confidence. Experienced investors know that the more they learn, the more they realise they don’t know. (I followed the Dunning-Kruger effect).

8: Not having a process

New investors just start buying and selling whatever stocks are popular. Experienced investors focus intensely on their investment process and make use of an informed process:

9: Overusing the P/E ratio

New investors use the P/E ratio to make valuation decisions. Experienced investors know the P/E ratio has huge flaws and it is only useful in phase 4

10: Using options, margin and leverage

New investors are in a rush to build wealth. They use options, margin, and leverage to juice their returns. Experienced investors know this is a recipe for disaster. Never forget Buffett's quote:

I personally have made every mistake on this list

This thread from 30 October 2020 shows how bad I was at investing when I first started:

When I started 'investing' in 2004, I had no idea what I was doing. I couldn't tell you anything about a balance sheet, income statement, management. To prove just how bad I was, I looked up the first stocks I bought in 2004-2007.

Here's how it went ... (stocks referenced are US companies).

Stock #1 - $STEM

I heard stem cells were going to be big, so I bought this penny stock. The only thing I knew was the ticker - that's it! I sold it for a 20% gain in a few months.

My feelings: Investing is easy!

Stock #2 - $DIGI

Another penny stock. I couldn't tell you ANYTHING about this company either. Bought for $1.40 and sold a month later a 5% loss.

My feelings: Investing is still easy! (currently about $0.10 share, down 90%).

Stock #3 - $ALT

Penny stock, I can't tell you anything about this company. Bought $1.01, sold a month later at cost.

My feelings: Investing might not be easy. ($ALT is unlisted today).

Stock #4 - $UAIR 

Penny stock and a company I know! I can't lose! Bought for $1.13. Sold for $0.75 three days later! My first 'big loss'.

My feelings: Investing is getting harder

Stock #5 - $VODG

Penny stock bought for $0.18 (So cheap, how could I lose?). Sold for $0.20 one month later.

My feelings: Investing is easy again!

Stock #6 - $DDD

Another penny stock, a clinical-stage biotech at the time, not 3D Systems. Bought at $3.15. Sold three months later at $4.50

My feelings: Investing is so easy. Who are these suckers that buy 'high priced' stocks?

Stock #7 - $DDD again

Back to old reliable! Bought at $4.83 (higher than my 1st sale price). Bought again at $3.50 (what a bargain!). Sold for $1.30 (biggest loss to date!). Eventually becomes unlisted.

My feelings: Investing sucks sometimes! No more penny stocks for me - too risky!

Then I screened for stocks based solely on trailing dividend yield. Nothing else, so bring on the huge dividends.

Stock #8 - $CIF

12% dividend. How can I lose? Bought $3.21. Sold $3.11

My feelings: Dividends!

Stock #9 - $IMH

22% dividend yield. I really can't lose now! Bought $17.05 (expensive). Sold $17.60 three months later (luck). (Current price $1.40)

My feelings: Dividends!

Stock #10 - $PURE

Back to clinical-stage biopharma penny stock that's going to the moon! Bought $1.90, $2.30, $2.40, $2.10. Sold $4.65 & $3.13 (success!)

My feelings: I'm getting better at 'investing'!

Stock #11 - $CLM

What's it do? No clue. 20% dividend! Bought at $9.15. Sold one month later at $8.20.

My feelings: What aren't these dividend stocks working?

The good news

I then consumed every piece of financial content that I can get my hands on at this time. Rich Dad Poor Dad, The Millionaire Next Door, etc. I discover buying 'good' companies is the way to go. 

I buy $EBAY, $GE, $BAC, $GOOG. I buy ETFs like $QQQ, $EEM.

Peter Schiff and Robert Kiyosaki convinced me that inflation is going to make the dollar worthless, so I buy $GLD, $SLV, $SLW and foreign stocks.

I still like dividends, so I buy $BP, $MO, $CVX, $PAYX.

I continue to read, read, read, read, read. 

I start to buy more good companies like $NFLX, $AMZN, $GOOG.

I start to develop a long-term mindset. I start to read @morganhousel and learn about market history and psychology. I abandon my desire to own gold/silver/oil.

My results since:

It's OK to suck in the beginning. I sure did! Get some skin in the game, make mistakes, and learn from them.

Connect with other investors, and develop a system.

Most of all, develop a long-term mindset. Invest, don't trade. Let's all get better, together!

 

Brian Ferodi is a US author who tweets @brianferoldi and writes a free weekly newsletter available here. This article is general information and does not consider the circumstances of any investor. Publication here is not an endorsement of the investment strategies described.

 

7 Comments
AlanB
August 13, 2022

Mistake #11 Being influenced by the supermodel on the IPO brochure. Thanks Jen. Thanks Myer.
Lesson: Beware celebrity spruikers.

D Man
August 13, 2022

Brian was a shameless promoter of his own stocks on a Motley Fool podcast during the post-Covid tech bubble days of 2020-2021. How many unwitting retail investors bought FVRR at $250+ after hearing his love stories about its awesome Net Revenue Retention figures and other superficial analysis. Then, as things get tough, the Fool cancels the podcast. Convenient. Would love to hear his updates on that one. Funny enough, it did not get included in this “mistakes” piece. He sounds like a wise and prudent investor in this. He was pushing 30x rev stocks when they were “hot”!

Graham Hand
August 13, 2022

If investment newsletters required authors not to have a vested interest in their subject before publishing their articles, some newsletters would have little content. How many of the fund managers' and other experts' articles published every day (mainly elsewhere because Firstlinks does not specialise in stock picking) are written by someone who already owns the stock and wants to convince other people of the merit? Yes, the beliefs are probably genuine but yes, they are writing to convince other buyers. But you rarely read an update article saying it's time to sell the stock before the author is out. ("I'll let you go first"). Given the large number of funds that lost money in FY22 from big falls in tech stocks, Brian would not be alone in his views on tech and revenue in 2021.

Graham Hand
August 13, 2022

A reminder to anyone who wants to comment. We love receiving them, but all comments are subject to our review and if we deem necessary, editing. If anyone does not accept this, then don't comment. No publication allows all comments to appear without moderation. If we edit a comment and the author doesn't like it, let us know and we will remove it completely.

D Man
August 13, 2022

Maybe for some. His amount of touting was on another level though. PM’s also have audited and available returns. Can you ask Brian to update his returns chart post Sep 2020? Think that would be revealing and interesting for your subscribers.

Jack
August 10, 2022

Yes, we probably need to make the mistakes before we really learn them. Like the markets a sell until its suddenly a buy. Then sell.

Mart
August 10, 2022

Great reminder of the fundamentals for success Brian, thank you. Timely that Vanguard Australia issued their updated index history chart yesterday which shows the growth of US and Aussie equities over many years. The short term is your lifetime, medium term your kids lifetime, and longterm is their kids lifetime !

 

Leave a Comment:

RELATED ARTICLES

Are more informed investors prone to making poorer decisions?

A colossal waste of time, but it's fun

Preserving wealth through generations is hard

banner

Most viewed in recent weeks

Raising the GST to 15%

Treasurer Jim Chalmers aims to tackle tax reform but faces challenges. Previous reviews struggled due to political sensitivities, highlighting the need for comprehensive and politically feasible change.

7 examples of how the new super tax will be calculated

You've no doubt heard about Division 296. These case studies show what people at various levels above the $3 million threshold might need to pay the ATO, with examples ranging from under $500 to more than $35,000.

Are franking credits hurting Australia’s economy?

Business investment and per capita GDP have languished over the past decade and the Labor Government is conducting inquiries to find out why. Franking credits should be part of the debate about our stalling economy.

Here's what should replace the $3 million super tax

With Div. 296 looming, is there a smarter way to tax superannuation? This proposes a fairer, income-linked alternative that respects compounding, ensures predictability, and avoids taxing unrealised capital gains. 

The rubbery numbers behind super tax concessions

In selling the super tax, Labor has repeated Treasury claims of there being $50 billion in super tax concessions annually, mostly flowing to high-income earners. This figure is vastly overstated.

9 winning investment strategies

There are many ways to invest in stocks, but some strategies are more effective than others. Here are nine tried and tested investment approaches - choosing one of these can improve your chances of reaching your financial goals.

Latest Updates

Taxation

100 Aussies: seven charts on who earns, pays, and owns

The Labor government is talking up tax reform to lift Australia’s ailing economic growth. Before any changes are made, it’s important to know who pays tax, who owns assets, and how much people have in their super for retirement.

7 key charts on the state of the Australian property market

The Australian property market stirs fierce debate - often bullish optimism versus crash predictions. But beyond the noise, seven charts reveal what's really driving prices and the outlook for residential real estate.

A simple alternative to the $3 million super tax

Division 296 aims to introduce improved fairness into the superannuation system, yet is overly complex. This scours the world for better ideas and suggests a simpler alternative which can achieve the same goals.

CBA and the index conundrum for super funds

After the hyperbolic rise in CBA shares, super funds are floating the idea of carving out the weightings of ASX bank securities and indexing them within their portfolios. This looks at why that might be a big error.

Strategy

10 policies to drive Australian productivity higher

Here's a comprehensive list of proposed reforms to fix Australia's stagnating economy, including introducing a flat income tax rate, reducing migration, and making childcare tax-deductible.

Interviews

Where to find big winners in Asia

As more money looks for a home outside the US, Asia may soon get some love. Fidelity's Anthony Srom outlines the best places in Asia to invest, including in Chinese consumer names, Indian financials, and Thailand.

Investment strategies

We have trouble understanding the time value of money

We overvalue the present and underestimate the future - it’s a cognitive glitch called hyperbolic discounting. It affects savings, spending, and loans, and it's more common - and costly - than we think. 

Sponsors

Alliances

© 2025 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.