I often talk about how I was so wrongly approaching value investing/stock investing when I first got started.
I thought I was a value investor by strictly buying companies that looked “cheap” based on my DCF models. I assumed if my DCF models said the stock was cheap, it was a buy, and therefore, I was buying an “undervalued company”.
I quickly learned this was not true value investing and that just because I input my assumptions into the DCF model, that didn’t mean they were right or that the market would agree with me.
Remember, that is purely quantitative and does not take into consideration the future of the business and its qualitative aspects.
What I did wrong early in my investing career was exactly that — I did not look at non-financial aspects of the business, nor did I try to think logically about the future of the company and its industry.
Having learned from those experiences and growing as an investor over the past eight years, I now spend significant time considering the future prospects of a business and its industry.
Also, it is not enough to simply analyze a company in a vacuum and make an investment decision. Investors must compare their expected return of one investment to that of another option available. Your dollar can only be invested in one place at a time — choosing the optimal place for that dollar to be invested is equally as important, if not more important.
Another common mistake amongst investors, and one I used to make as well, is not adjusting abnormal or outlier financial results.
When I was first starting out investing, I made this mistake all the time. Just because a company has one good break-out year, that doesn’t necessarily mean that the future results will continue to grow from there. Rather, it is often more likely that the company will revert to historical norms.
If the adjustment isn't made, investors are often misled to believe a stock is worth significantly more than it truly is.
Lastly, along with the current valuation, I look at the current momentum of the stock. If it has negative momentum, this tells me the stock may trend downwards in the near future and there may be a better buying price on the horizon. Momentum is no guarantee, but it can help investors avoid buying as a stock continues to fall.
What mistakes have you made with stock investing?
All the best,
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