4 Basic Investing Mistakes that You Shouldn’t Make

In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves.”

—Erik Falkenstein

Swedish economist Erik Falkenstein makes a good point. For those of us who are just beginning to invest, we may want to think of reducing errors first.

His point became more apparent while I was chatting with some ex-colleagues who are new to investing.

It dawned on me that there were several basic misconceptions about investing that may be prevalent among new investors. I feel that most of these errors can be easily avoided if only people were made more aware. So, here’re four such mistakes.

Mistake No. 1: The Expensive Stock click here

Mistake No. 2: The Uncertainty Paradox click here

Mistake No. 3: Chasing short term gains  click here

Mistake No. 4: The Fallacy of A Scary Stock Market

“If the market drops, it will be scary”

The stock market will fall from time to time. The graph below shows the maximum drawdown for the Straits Times Index (SGX: ^STI) in each year from 1993 to 2014. (The maximum drawdown measures the largest peak-to-trough drop for a given period of time.)

Maximum drawdown for Straits Times Index, 1993 - 2014

Source: S&P Capital IQ

Historically, the Straits Times Index has fallen by 20% or more in nine out of the last 21 years. That’s almost half the time.

The statistic you’ve just seen may seem scary. But, it does not have to be. For one, we have to keep in mind that the Straits Times Index had jumped by 86% from 1,531 points at the start of 1993 to around 2,850 today – that has happened despite all the painful drops you’ve seen in the chart above.

Also, running away from falling stock prices can be akin to turning down your favourite bottle of wine (can of drink / slab of meat / bag of snacks / [insert your personal favourite]) when it’s on sale. Instead, if our favorite companies are offered at a discount, we may want to show interest, as we do with our favorite bottle of wine.

Admittedly, not all that is cheap is worth buying, but if we have done our research, then a lower stock price should be a welcome development.

Foolish takeaway

If you are starting to invest, here are a few things you might want to keep in mind: (1) Understanding the difference between price and value may be where you want to start; buying shares with low prices may not always work out. (2) Trading around uncertain global events is not a good way to invest. (3) Capping your gains can hobble your future returns. And (4) The falling stock market need not necessarily be scary.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chin Hui Leong doesn’t own shares in any companies mentioned.