Ten Common Mistakes

Mistake # 1: Buying the wrong stocks at the wrong price

According to Buffett, there’s only two things common investors can do wrong:
1) They can buy the wrong ones, and
2) They can buy or sell them at the wrong time.

How to avoid it:
1) Find high quality stocks
2) Find the reasonable buy price and
3) Buy at the right time

Checklist:
Please add the following simple rules to your checklist to avoid the two most important mistakes:
Rule 1: Do not compromise on quality of stocks
Rule 2: Do not buy high quality stocks at high price

 

Mistake # 2: Buying low quality stocks
According to Buffett, it would be difficult for investors to pick stocks that are better than average. Stocks are a good thing to own over time.

How to avoid it:
You only need to make few decisions in your lifetime to be a successful investor.

1) Look for companies that have sustainable competitive advantages (wide moat) over its competitors in order to protect its long-term profits and market share from competing firms.

2) Own a cross section of companies that in aggregate are bound to do well. A low cost index fund will achieve this goal.

Buffett looks for consumer monopolies that offer product or services where there is little or no competition. This could be due to brand name, patent, low-cost producer and switching cost that makes the product or service unique.

Checklist:
Please add the following simple rule to your checklist:
Rule 3: At a minimum, try to stay away from low quality stocks.

 

Mistake # 3: Buying stocks at the wrong time
Most common investors do not know how to value a business or what is the right price to pay.

How to avoid it:
1) Try to find the reasonable buy price based on discounted cash flow or historic valuation models, and then wait patiently to buy quality companies at the right time.

2) Try to find the reasonable valuation of the index using historic valuation models, and then wait patiently to buy the index fund at the right time.

Buffett always says, be greedy when others are fearful, and be fearful when others are greedy.

Checklist:
Please add the following simple rules to your checklist:
Rule 4: At a minimum, try to stay away from stocks or markets when they are trading at historic high valuations.
Rule 5: Do not buy stocks or index funds when the market is trading at historic high valuations.

 

Mistake # 4: Selling stocks at the wrong time
Most common investors sell stocks when they are trading at low valuations.

How to avoid it:
The world is not going to stop. History has shown that market corrections offer attractive prices. This we saw during dot-com burst in year 2000 and financial crisis in year 2008. The market will always bounce back immediately after the crisis.

Buffett always says, you shouldn’t get fearful when others get fearful.

Checklist:
Please add the following simple rule to your checklist:
Rule 6: At a minimum, do not sell stocks during market crash or when they are trading at low valuations.

 

Mistake # 5: Selling stocks during market crash
If you look at history, there is a significant correction in the market every 8 years. There was dot-com burst in year 2000 and financial crisis in year 2008. During these times, market and good quality stocks corrected anywhere 30-40%.

In 2008, Asian Paints fell from Rs 120 to Rs 80, and now after 8 years it is Rs 1165.

One thing is sure, history repeats itself and most people sell in panic during these times.

How to avoid it:
The world is not going to stop. History has shown that market corrections offer attractive prices. In 2008, Indian market went from 20000 to 8200, which is a 59% correction, and now after 8 years it is 29,000.

Keep buying high quality stocks and/or index funds regularly during market corrections. You don’t buy all at one time.

Checklist:
Please add the following simple rules to your checklist:
Rule 7: At a minimum, do not sell stocks or index funds during extreme panic situations such as financial crisis in 2008.
Rule 8: At a minimum, try to buy low-cost index funds.

 

Mistake # 6: Selling winning stocks too early
Most common investors sell their winning stocks too early.

How to avoid it:

According to Buffett, if you pick the right companies, you don’t need to sell them.

Most successful companies try to retain high performing employees and remove the low performing ones.

Checklist:
Please add the following simple rules to your checklist:
Rule 9: Do not sell high quality companies with good long-term prospects
Rule 10: Do not look at stock prices very often

 

Mistake # 7: Holding losing stocks too long
Your original thesis is no longer valid due to following reasons:

1) the company no longer maintains its competitive advantage
2) no longer run by honest management

More money is lost by people who have held on to bad businesses hoping to get their money back some day.

 

Mistake # 8: Worrying too much about price volatility

History has shown that owners of stocks who can sit quietly for decades made enormous wealth. The wealth is transferred from active to passive.

According to Buffett, wildly fluctuating prices gives enormous advantage for investors who want to buy high quality stocks at reasonable valuations. You could buy quality companies when the price is ridiculously low, and you could either sell or hold on to them when the price is absurdly high.

During market corrections, paper loses occur and it is normal. If you own high quality businesses with good long-term prospects, why would you consider selling them?

Checklist:
Please add the following simple rules to your checklist:
Rule 11: Do not check stock prices frequently

 

Mistake # 9: Relying on stock tips of others
According to Buffett, risk comes from not knowing what you are doing, listening to the macro or market predictions of others is a waste of time. Indeed, it is dangerous, because you may buy something which you don’t understand.

Checklist:
Please add the following simple rule to your checklist:
Rule 12: At a minimum, try to stay away from TV recommendations

 

Mistake # 10:  Trying to time the market
According to Buffett, it is impossible to predict what the economy, interest rates, or the stock market might do in the coming years. It is of no importance to him when buying an attractively priced stock. If you think there might be a better price later does not make sense.

It is almost impossible to pick stocks at bottoms.

Checklist:
Please add the following simple rule to your checklist:
Rule 13: At a minimum, do not try to predict the market direction

 

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