There is not a single mistake that leads to poor returns. Its a repeated combination of mistakes overtime.
Having unrealistic expectations for growth and not knowing when to cut my losses are the 2 biggest mistakes I have made in the past. Everyone buys stock with hopes of the price increasing. What you do when the price drops is the difference between losing a little or a lot.
I clearly remember having a stake in (Twitter) back when it was trading around $50 a share. Suddenly Twitter started dropping and dropping. I took this as a buying opportunity to get a killer deal, so I bought more to average my cost.
Little did I know that the recent drops would continue to go lower. Before I knew it I was $2,000 down on a company that I thought was a bullet proof social network. Twitter now trades around $16 a share.
The point to my story is that it is important to know when to cut your losses and get out. My general rule of thumb is to get out completely, or unload half of your shares, when a company drops 10-12% from what you bought it for.
If I would have known this I could have lost $500 instead of $2,000.
On the flip side you can get out of a stock too early. I remember buying into (Tesla) a week before it released its earnings one quarter. I bought at the beginning of the week and was up a good $400 by weeks end.
Instead of potentially losing my $400 I decided to sell right before they released earnings. This was a huge mistake.
Tesla is known for being a very volatile stock. It jumps up just as fast as it drops. It turned out that Tesla reported decent earnings and great future growth.
The stock shot up $11 a share the next day and I lost out on an additional $800. While I didn’t lose money, I still felt bad for missing out on the gains.
Although it is impossible to predict what a stock is going to do, there are ways to make educated guesses. The best way is to do your homework on the company.
Look over their balance sheet, income statement, and cash flow. These tools are available to everyone by simply looking at Google Finance, Yahoo Finance etc.
If you put in the time it takes to research a stock you will be much more prepared to make smart decisions on where you think the company is going. All this gets faster and easier with time.