Stock market investing has had somewhat of a resurgence in Zimbabwe in 2020 thanks to stellar returns on the ZSE. To this, we have added the foreign currency-denominated Victoria Falls Stock Exchange (VFEX) Zimbabweans are even more excited about stock market investing. Stock markets have created a lot of wealth but for those who have committed some of the 7 deadly sins we are about to go through they have also been a sinkhole of wealth.
Buying Stocks Instead Of Companies
There’s a tendency to look at the performance of stocks from a technical perspective instead of a fundamental business perspective. In principle, investors buy into businesses and enjoy the returns in the form of dividends or appreciation of their investment. The investment appreciates because the value of an asset (share) is the present value of the sum of its future cash flows. In simple terms, the value of shares is based on how much the business is expected to earn in the future. So you will often get advice to buy businesses you know. I would tweak that a little and say know the businesses you buy.
Expecting great stock tips to fall into your lap is a big problem. I’ve been asked for tips many times and all I can really tell people is what I am invested in and why. You really have to do your research. Even when dealing with stockbrokers, good ones will explain why they back certain stocks. What that should tell you is they have done their homework. Have you? If you want something easy stock market investing may not be the thing for you.
Not Setting Goals
Yes, the stock market is unpredictable, many factors go into stock prices. However, if you go into the stock market investing game without goals you are likely to succeed at nothing. Just to be clear goals must be measurable so being rich does not qualify as a goal. A measure such as 10% growth is a goal. Or perhaps achieving a holding of a certain size like 10000 shares in a specific company. Without set goals, you are likely to blow with the wind and that is when it is most dangerous to be in the market.
This could easily have been number one but I thought it made sense to introduce it after the last one. A lot of money has been lost from being greedy. Whether you are invested for the long term or short term jumping onto bandwagons can be dangerous especially if you jump on at the end of a positive period and the beginning of a decline. Greed will have you investing too much or holding on too long to things you perhaps should not. Having goals and a strategy help guard against this. I have a percentage of my portfolio that is dedicated to chasing such opportunities but it is always limited and does not change.
Ignoring stop losses
They say once you have something the risk of losing it becomes real. Nowhere is themself truer than on the stock market. A stop loss is a level which you set that indicates that it is time to sell a stock and stop your losses before they go any further. Say you buy a share at 50 cents and it goes up to 1 dollar. If you have a stop loss at 5%, your policy is to sell the stock if it drops by 5% or more. So if it drops to 95 cents or lower you sell and protect your money. If the stock rises to 2 dollars but you keep your stop loss at 5% the stop loss price becomes $1.90. Advanced systems set these up automatically but it can still be done manually.
No plan here refers to the lack of an overall financial plan rather than the lack of a stock market investing plan. Many times I’ve seen people ask “what are the best companies to invest in”and I silently ask “best for who”? It all depends on you and your goals. While we will certainly welcome any positive returns in the short and long term you need to look at your personal reasons for stock market investing to inform of the type of companies you are looking to invest in. Without a financial plan, you will find it hard to know this.
Betting it all
I love sports and have a knack for getting many (but not all) match predictions right. Well, not completely but I can pick a winner. A friend who really got into sports betting asked why I don’t bet and my response was simply that I don’t bet on sports especially when I think I’m right. After seeing returns in some companies I’ve seen people tempted to sell off all their unused and even some used items to put the money in the stock market. The ZSE thanks to its inflation-beating returns has seen an increase in activity. Sadly not all activity has been rewarding. This really ties into the advice about doing your homework. homeworking a certain company feels like a gamble that’s likely because it is a gamble. The stock market is not the place for making bets.
Avoid these 7 deadly sins to give yourself a chance of succeeding. Whether you are focused on the ZSE, VFEX or some other exchange.