10 common Mistakes causing major losses for stock investors

For those new to stock investing, and even for seasoned investors, there are times when they are misled about a stock’s price, leading them to invest capital only to suffer heavy losses. Below are 10 common Mistakes for stock investors are making.

10 Big Mistakes Stock Investors Make

These are points made by Peter Lynch, a world-renowned investor and fund manager, listed among the top 10 most successful investors of all time.

#1: The price has dropped this low, it can’t go any lower

Peter Lynch recounts his own investing misjudgment when he invested in Kaiser’s stock in 1971. When the company’s stock price dropped from $25 to $11, he thought it was as low as it could go and decided to buy 5 million shares.

The stock price then dropped to $8, then $4, and he, his boss, and his family had to endure losses for many years before being able to exit at $30.

He says that this harrowing experience taught him that the thought “the stock price has dropped so it can’t go any lower” is incorrect. A stock’s only limit is zero, but any price can happen.

#2: Trying to catch the bottom of a stock

Peter Lynch believes that trying to catch a falling knife, not knowing where the bottom is, is akin to catching a falling knife. According to him, people should wait until the knife has fallen to the ground and shaken for a while before starting to buy.

Very few investors can catch the exact bottom of a stock because its price doesn’t immediately rebound; it fluctuates for a while, short or very long, before rising again. Therefore, guessing the bottom of a stock is extremely difficult, as many investors think a price is the cheapest, but no one expects it could be even cheaper.

#3: Thinking that the price is too high, it can’t go higher

Whether in theory or reality, a stock price has no limit on how high it can go. Looking at the history of many American tech stocks, their values have increased thousands of times.
The price of a stock will be limitless if the company continuously makes a profit and maintains stable business operations.

#4: Thinking cheap stocks mean there’s nothing to lose, so why not try?

Many investors mistakenly think that cheap stocks are less risky than expensive ones. However, are you aware that cheap stocks can drop by 50-90% in value if the company does poorly?

In reality, cheap stocks are riskier because investor expectations for these companies are not high. Expensive stocks belong to companies with good business situations and stable operations.

Overall, whether a stock is cheap or expensive, it can go to zero if the business goes bankrupt. So investing in cheap stocks can also mean losing all your investment.

#5: Just hold on, and the stock price will return to its previous peak

This is a misconception of many who are determined to hold a stock, waiting for it to rebound, while the stock is entering a period of decline.

In the case of new  stock investors, and even those with many years of experience, there are moments when they have misconceptions about a stock’s price, leading them to invest capital and then suffer heavy losses. That is one of 10 common Mistakes for stock investors.

#6: “Darkest before dawn” mentality

Many investors mistakenly believe that a situation can’t get any worse and will eventually improve. However, this isn’t always the case.
Peter Lynch illustrated this with the example of U.S. oil rigs:

In 1981, the U.S. had 4,520 operating oil rigs. However, by 1984, this number dropped to 2,200, prompting investors to buy oil and gas stocks, thinking the market had bottomed out. Yet by 1986, the count fell to 686, and in January 2021, there were only 378 rigs. Investors who bought stocks of halted rigs can predict their fate.

#7: Waiting to sell at cost price

Many investors stubbornly hold onto stocks that have plummeted, hoping to sell when they break even or turn a slight profit.
Peter Lynch points out that many stocks never return to their former peaks or take a long time to do so. Holding such stocks means missing out on investing in others with higher potential returns.

If you believe a stock will rebound to your cost price, why not invest more to lower your average price? This indicates a lack of confidence in your decision.

#8: Believing defensive stocks are always safe

Some investors misunderstand defensive stocks, thinking they are less volatile than the market. However, defensive stocks aren’t always stable.

For example, Consolidated Edison’s stock in the 1970s and 1980s was considered safe with minor fluctuations. Yet, changes in nuclear energy regulations and infrastructure issues led to an 80% drop from its peak. Although it later recovered, not all stocks do. Imagine the resolve needed to hold a stock that has plummeted 80% from its peak!

=> Peter Lynch asserts:

Businesses are always in flux, and prospects continuously change. You can’t ignore information about a stock you own.

#9: “Heavy-bottomed” stocks that don’t rally

Stocks that don’t significantly rise when the market goes up are often referred to by investors as “heavy-bottomed.” However, it’s not uncommon for investors to wait a long time for such a stock’s price to rise, only to sell in frustration just before it starts to rally.

Peter Lynch gave the example of Merck’s stock, considered “heavy-bottomed” as it showed little movement from 1972 to 1981, despite the company’s consistent revenue and profit growth. Many people, disheartened by its stagnant price, sold their shares, only to be surprised when the stock quadrupled in value within five years.

#10: Regretting missing out on soaring stocks

Some investors regret not buying into trendy stocks and witnessing their rapid price increase.

Later, seeing others profit from these investments, they lament not buying the stocks for short-term gains. Missing out on one opportunity, they hastily invest in another, potentially leading to costly mistakes.

You might chase after hot stocks but end up with poorly performing companies. When the truth is revealed, and you want to sell, there might be no buyers, even at the lowest prices.

Further useful information: What are blue-chip Stocks?

Above are the 10 common Mistakes for stock investors shared by Peter Lynch. If you’ve thought this way, it’s time to reassess your investment strategy. Choose stocks of profitable, well-managed companies. If stock prices fall, consider buying more and holding for the long term for fruitful gains. Wishing you success.