The information below was gleaned from investment and trading books, as well as financial and investment publications. The information is also based on my personal experience as a stockbroker helping many investors and traders over a long period of time.
Many of the mistakes mentioned I have made myself; the best way to learn and to avoid them in the future.
Mistake 1. Emotional decision making – The biggest mistakes I saw traders and investors make were making emotional versus rational decisions based on sound investment or trading principles.
Fear and greed are powerful emotions that get in the way of rational decision-making. Fear is the more powerful emotion. I have seen many clients sell at very low prices only to see prices climb higher several weeks to several months later.
When investors see prices climbing, the emotion of greed can take over, causing an investor to pay a higher price than they should because they don’t want to miss out on a climbing stock. Also, when owning a stock and prices are climbing, investors tend to get too optimistic and don’t take profits when they should because they hate seeing the stock go higher if they get out.
How to avoid mistake #1. – Extreme emotions in the market can lead to reversals in prices, bullish to bearish, and vice versa. Use emotions to your advantage.
"I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful."
Warren Buffett
You may also consider using stops to help you avoid emotional decision making.  A stop order is a contingency order that becomes a market order if the stock trades at a certain limit.  For example, say a stock is trading for $100.  A trader placing an order to sell the stock at a stop price of $98 is instructing the broker to make the order a market order if the stock trades at $98 or lower.  Stop orders do not prevent losses!  The reason is the order will trigger a market order if the stock trades below $98 as well. The stock could open for trading at $80 and the trader will be sold at this price instead of the $98 he was expecting.
A trailing stop is a strategy some investors/traders use that can help you avoid emotional selling. You essentially raise the stop every time the stock moves up. For example, if you bought a stock at 20 and if you’re willing to lose 10% and there also seems to be support at $17.50, you place the stop at $18. If the stock rises to 23 raise the stop to 20, keep raising the stop as the price climbs, while locking in your profit. The biggest problem with stops is people forget they have them and they may sell the stock and not cancel the stop. Remember to always cancel the stop if you sell the stock.
The best way we believe to avoid emotional investing/trading is to learn and master a discipline and stick to that discipline.
Not having a discipline is another big mistake we saw investors make and is the subject of Mistake #2.
Mistake #2. Undisciplined buying and selling – Many times a client would call in with a losing position. I would ask the client why they bought the position. Many times they would say they heard it on CNBC or a friend or family member told them they should buy it. If they told me they use independent company research reports or they used moving averages, I knew they were using some type of discipline or system.
Undisciplined investors/traders remind me of a puppy dog, running around, going in many different directions without going anywhere. As mentioned in Mistake #1, investors and traders must learn to master a discipline and then stick to the discipline. There are lots of systems and, disciplines that can help you make money. Learn about a few ,and focus on one or two (it’s ok to use a couple, I personally use both technical and fundamental analysis) that makes the most sense to you.  Keeping in mind the type of risk/return you are looking for, and complexity or simplicity. Once you find one, learn it, master it, then paper trade for a while for the experience. Once you feel your are ready, go for it. Make sure you stick to your discipline.
Best way to avoid Mistake # 2
Before you enter a trade you must answer the following six questions:
1. What should I buy?
2. Why should I buy it?
3. When should I buy it (what price)?
4. How much should I buy?
5. When and how do I monitor the position?
6. When do I sell (what price)?
The discipline you use should help you answer the above questions.
Please review our list of book recommendations that can help you find a discipline that could help you meet your investment needs.
Mistake #3. Not monitoring or neglecting your investments – It would always be amazing to me how investors would neglect their investments. I am sure a lot of it has to do with how busy we all are. I would always tell them if they don’t have time to manage their money, then they need to hire a professional to help them. In the division, where I worked at in at Schwab, we would not make recommendations, but once a client had a position we could give “Help & Advice”. Most of the advice we gave was based on the enormous amount of excellent research Schwab had on their website.
How to avoid mistake #3 – Hire a professional to help you. Watch for an article we will be writing on how to select an investment professional. There are many individuals who consider themselves investment professionals and they are available at most banks, credit unions, and insurance companies.  , as well as independent financial planners and the traditional brokers at the big brokerage firms are also options. Briefly, here are a few things to consider when choosing an investment professional:
- Performance – Ask what type of performance a typical client has received in an investment cycle, ,and how did they do in good and bad years.
Although most financial professionals at the individual level do not manage money personally, they normally will pick a mutual fund or money manager for you. Most financial professionals at the personal level are asset gatherers and relationship builders and are not money managers. Be sure to ask them how they are paid; they are either paid a fee by you, or a commission, or a combination of both.
Risk – How much risk is being taken? Risk measurements include:standard deviation, beta, down years compared to peers, liquidity, Sharpe, alpha.
- Qualifications, including education, and designations e.g. CFP, CFA, MBA
- Experience – Make sure they have been though at least one up and down market cycle
- Get and check references – Make sure you get several references and check the references. Make sure the references do not include relatives and close friends.
- Integrity – The best way to get a feel for the advisor’s integrity is with the references he gives you. You can also check professional groups and regulatory agencies about the investment professional you are considering.
- Rapport – It’s important that you have good relations with your advisor or team. First impressions are always important. Do you see yourself having a long-term business relationship with this person?
When I started out as a stock broker most brokers knew how to pick stocks and were sometimes called “stock jockeys”. Most did not practice diversification and they normally stuck to a few favorite stocks or an industry. One of the best trends to occur in the investment business is the team concept. Brokers no longer try to be lone rangers and try to do everything themselves. The team concept makes lots of sense, for example, a team may consist of a tax, estate planning, and investment specialists as well as a business development and marketing person. Many of these teams require their clients to have a substantial portfolio to get started.
Mistake #4. Doing nothing – Some investors have a very difficult time making a decision and they take the path of least resistance, which is normally to do nothing. Some investment professionals call this inertia, which is the enemy of investors. It can lead investors to not making changes to their portfolio, which including not selling poor performing investments.
Investor inertia should not be confused with patience or a buy and hold strategy. Some behavioral specialists explain inertia as the “sunk-cost” syndrome: once you invest your money and resources into something you also make an emotional investment. That investment, and commitment sometimes creates a feeling that you must see the investment to the end.
There is also a desire to avoid the pain of accepting a loss. By staying with the investment, it’s just a paper loss. You hang on to a “slope of hope”, hoping the investment will turn around. If you sell, the loss becomes painfully real. This behavior is even stronger when the money is your serious money for yourself, or your spouse’s IRA, or your child’s college money.
Analysis leads to paralysis is another problem that leads to inertia. This problem normally affects perfectionists.
How to avoid Mistake #4 - To avoid inertia, learn, and master, and stick to an investment discipline or hire an investment professional to help you.
One of the disciplines that investors should consider is how to sell. You can start with books such as “It’s When You Sell That Counts” by Donald L. Cassidy.
Mistake #5. Inability to take a loss – A similar mistake to taking no action is not being able to take a loss; this is a more specific problem than taking no action. It’s natural for individuals to like to make money and it’s natural to hate losing money. Many professional investors/traders agree that you must learn how to take a loss, learn from it, and move on, its as it is part of investing/trading. You must accept that you will have losses as an investor/ trader.
There are several situations I found where individuals had a very difficult time taking a loss. Some individuals were very risk averse, and should probably not be investing in individual stocks. and   They should stick to conservative investments like mutual funds, fixed maturity AAA debt, or government bonds.
Some people just had a very difficult time accepting their mistake or that the market went against them;  perhaps we can attribute this to their strong ego. Many of these types of people were very successful entrepreneurs, doctors, and other professionals. Many thought that their professional success could carry over to success in investing and they become very frustrated with losses.
How to avoid Mistake # 5 - Here is my own personal advice. Whatever profession you are in, you know that it takes education,/ knowledge, experience, and skill, to be a success. The same is true with investing; you can’t expect to become an expert at investing or trading without some experience, knowledge, and paying your dues. Master, learn and stick with a discipline, gain experience, take calculated risks, and have fun. The mistakes you make can be some of your best lessons. You will probably never make them again.
If you find taking losses too painful then investing may not be for you. You should probably delegate your investing to a conservative investment professional.
Mistake # 6. New trader success leads to overconfidence and increased risk taking – Unfortunately I saw this happen too many times with new traders with lots of money in the bull market of the late 90s bull market. In strong bull markets it’s easier to make money, which can lead to overconfidence and taking on more risk. Here is the progression that I used to see. The individual would buy some stock in an uptrend and make a nice return. They would think, this is it was easy. They would then leverage themselves on margin to increase their returns. The next step would often be the use of options. Just about this time the market would go through a correction and the options would decline in value because of time decay and the volatility premium would dry up leading to heavy losses. If you are a new trader, don’t let this happen to you.
These mistakes are probably being made less by new investors/traders now because we are no longer in a strong bull market, but the lessons to learn are the same as mistake # five, acquire knowledge, gain experience, and know how much risk to take.
How to avoid Mistake # 6 – If you’re a new trader, accept the fact that it takes time to become a good investor/trader and there is a lot to learn. To really accumulate wealth, it is a long-term process and does not happen overnight. The markets don’t go up forever and fortunately most bear market don’t last long. You should learn now to anticipate the declines, and then take advantage of them.
Mistake #7. Over trading – The opposite of inertia and doing nothing is being too active. There are academic studies that state that active traders/investors tend to underperform the market. Some of the problems they face are high transaction costs, or lack of discipline, or emotional investing. The studies also state that overactive traders tend to be men.
Remember, “money is like soap, the more you play with it the less you will have”. Try not to over trade , again,and remember to learn and master a discipline.
Mistake #8. Investing in last year’s hot stock or mutual fund – Most investment professionals agree that many mutual fund investors make this mistake. I have seen stock investors also make this mistake. The economy and markets are always going through an economic evolution. The money flow of the economy and the markets changes and it reflects the growth, problems, and opportunities of societies, businesses, and consumers. When I became a stockbroker in 1980, energy and oil stocks were the high performing stocks., then  money flows shifted to consumer stocks, next ecology stocks, then biotechnology stocks, and in the late 90s it shifted to technology stocks. You can tell that investors/ and traders are still enamored with technology stocks today by looking at the daily most active list and you can see that investors are still trading and investing in yesteryear’s best performers.
Investing is all about anticipating the future, not looking at the past. The great thing about the markets is that they funnel money to areas of the economy that can solve problems,  and create jobs, innovation and potentially create new industries. What Some companies are solving our energy, security, and health problems, etc. while others and which companies are creating the new products and services the world wants.
How to avoid Mistake #8 – If you’re investing in mutual funds always look at a 5, and 10 year track record because you want to see how the money manager performs in good and bad markets. A year track record tells you very little about a money manager. If you’re investing in individual stocks, the successful investor anticipates trends and they don’t spend too much time looking in the rear view mirror.
Mistake #9. Making decisions based on taxes or what you paid for an investment – Another mistake that I saw investors make all the time was they would not exit a stock because of the tax ramifications, or because of what they paid for the stock, or they were concerned about commissions.
I would explain to a client why they should sell after some bad news or an impeding bear market, but they would continue to hang on to a stock because of taxes or they were worried about commissions even though the prospects and the probabilities were very high that the stock would continue lower due to both fundamentals and technical reasons.
How to avoid Mistake #9 - Taxes and your cost basis of an investment could be a part of your decision to sell or hold, but it should not be your primary consideration. The prospects of the investment positive or negative should be the basis of whether you sell or hold an investment. Of course if the stock’s prospects are good then naturally hold.,  iIf the prospects are poor and down, then an exit should strongly be considered. You can talk to your accountant how to minimize the tax impact. Do not let a tax problem, cause a gain turn into a loss., another problem. I have seen this happen too many times.
Mistake #10. Trying to get the exact high or low – One of the frustrations that I observed investors/traders have was trying to enter or exit an order at the exact high or low. A client would ask me what the high and low was for a stock and they would place their order at the low price if they were buying or the high price if they were selling. More often than often they would not get the price. If you’re a perfectionist or a “control freak”, investing/trading will be difficult for you. If you’re buying and trying to pick the exact low, you will miss many opportunities. If you’re selling and trying to get the exact high, you could wind up seeing a gain turn into a loss. If you’re a perfectionist, do not bring this trait to investing, especially if you’re trading.
How to avoid Mistake #10 – Always have a target price for entry and exit based on a sound investment or trading system. If your analysis shows that the stock is oversold or undervalued, go ahead and buy the stock at the market but keep some cash in case the stock does go lower you can add to your holdings. Consider positioning yourself into the stock and don’t buy all at once. If you own a stock and it has met your price target, and it is overvalued, and overbought, go ahead and take some profits and place an order at the market. If you have several hundred shares, consider keeping some so you can sell those at the higher prices if the stock moves higher. There seems to be a truism in the market that if you buy something today, it will be lower tomorrow, and if you sell something today, it will be higher the next day., This seems to be true, especially for me. That is why you should position yourself into and out of a stock.

We plan to provide more articles, courses on how to develop a strong buy and sell discipline.
Mistake #11. Taking Profits Too Soon
How to avoid – Learn and have discipline. Have price targets before you invest.
Mistake #12. Holding on to Losses Too Long
See mistakes, #4, #5, and #9
Ask yourself, at the current price, would you buy more?
Why is the stock down? Company, industry, or market news and or events.
Has the reason why you bought the stock changed?