5 Stock Picking Mistakes Every Beginner Should Avoid

Ever since I started investing in the public markets, I have made several mistakes that taught me some valuable lessons. I share this with you all in the hope that you learn from my mistakes and don’t repeat it for yourself.

Let’s dive in:

Mistake #1: Listening To Stock Advisory Services

Too often, beginners choose to go ahead with what others are recommending.

They don’t know where to begin. So they think following an influencer or a stock advisor would be a good place to start. Only to end up with headaches and heartache months down the line when the stocks go wildly up and down.

But you can’t invest on borrowed conviction. When stock X is performing poorly and you’re worried, you want them to provide a solution – but they’re busy talking about stock Y.

Instead, you should focus on doing your own due diligence so that you know everything about the companies you’re investing in. That way, you can withstand volatility with conviction.

Mistake #2: Building A Portfolio Immediately

When you’re starting out, you want to immediately buy the first 15-20 stocks. You want to build your portfolio within the first month or so.

However, you don’t need to build a portfolio right off the block. You can take months, even years to build your portfolio of stocks.

Instead, spend your time reading books and shareholder letters of super investors.

Does an engineer build a bridge in the first year of degree? Of course, not. You don’t have to either.

Mistake #3: Buying Hot Stocks

Listening to the cacophony of the market, beginners usually end up buying the hottest stocks that everyone is talking about.

The reality is, stocks go in and out of favour very fast.

For example, Meta (Facebook) was a darling in 2020-21, but it’s a pariah today, down by ~70% from its all-time highs.

Rather, you should invest in companies that are within your circle of competence. Read their annual reports, listen to their earnings calls, and then decide whether to buy or not.

Mistake #4: Ignoring Valuation

This mistake is a result of FOMO. Beginners who invest right off the block tend to ignore if the price they are paying is fair or not.

Every stock has a fundamental value based on its cash flows and earnings. The stock market seldom values it fairly, however.

There are times when it’s exorbitant, and there are times when there’s a huge discount.

Invest your time in learning how to value a company so that you don’t end up overpaying.

Mistake #5: Anchoring Bias

When you invest in a stock and it goes higher or lower, you tend to overthink.

When it goes high, you think, “Well, it’s expensive now. So I shouldn’t add further right now.”

When it goes low, you think, “Looks like it’s getting hammered, I shouldn’t add at this point. What if it goes down further?”

Basically, you’re anchored to the price you paid first.

When you do your due diligence, you understand the fair value of the company. You are better equipped to judge if the price is within your range to purchase or not.

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