First kind of mistake is the one that helps you realize you have gone wrong and try to learn from it and other one is you tend to live in the imaginary world with those mistakes.
Mistakes in markets are quite common. No one can always predict the market correctly and mistakes and being wrong in market is part and parcel of being a trader or an investor.
According to me there are two types of mistakes that people make in market. First kind of mistake is the one that helps you realize you have gone wrong and try to learn from it and other one is you tend to live in the imaginary world with those mistakes.
If you cannot learn from your mistakes in market, you will be punished badly.
Such imaginary world of market mistakes arises from TV experts who have laid the foundation in us to believe in those mistakes and live with it. So let me share with you what are those mistakes that make trader and investor push in the imaginary world of market.
1. Trading when you think you are investing
Investing for a longer duration of 6 months plus means investing is quite common among traders in market. With a view of a year they think they are investing.
I get so many emails asking I have a long term view to investing which is a year or two. Year or two is a long term view but not for investing but for trading.
Investing means you understand the business and then be part of it financially and give time for the business so it can turn things around from where it is currently and that can never possible in a year or two. Needs at least 5 years to a decade.
If you are investing with a time horizon of a year or two, you are actually trading and not investing.
2. Trading without knowledge
I was no different. I started into market in 2007 just because I thought I had some extra cash that I can use for some handsome returns from market. Check my about page on why I blog and the most important reason for me to be a financial blogger was — we jump into market without any knowledge and over the moon expectations and very few people who actually can make money out of it.
The story of getting started investing into market is same for all of us. 90% of the people loose money and only 10% of the people make money from market. Market is a zero sum game and so those 10% of the people who make money from market need those 90% of people in market to loose money. Someone has to loose the money for others to gain.
Ideally I should have got some education about how market works before jumping into it but after loosing my hard earned money, I managed to learn about how market works and profit from it but not many would be able to do that and have silly reasons for quitting the market.
3. Risking more money than you can afford to lose
Getting started with market to make a fortune is not a realistic goals. There are many theories available in market and you have to let yourself understand what theory would work best for your mindset. You can be wrong and would loose some money trying to understand what works for you.
Let us understand with a simple example on diversification. You should not keep all your egg in one basket and so you should diversify when investing in market but if you read the book The Warren Buffet Way, you may get the feeling, you should be doing focus investing and not diversified investment. If focus investment is a way of Warren Buffet, you will always be tempted to go for it.
The other example could be on the concept of investing which is buy low and sell high but the concept of trading is buy high and sell higher. You can set aside so many examples of both working as well s not working but what could work for your style is an experiment that you need to perform.
If I have a long position and if the stock goes down, I become nervous and so for me technical analysis works better where I buy high and sell higher. I am trying hands-on investing fundamentally where profits from my trading is being invested for a time horizon for a decade in solid companies. I prefer to have separate account for my trading and investing to make me more organized.