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Twenty-One Costly Common Mistakes Investors Make 303

less individual risk takers, from inexperienced beginners to smart profes-
sionals. What I’ve discovered is it doesn’t matter whether you’re just getting
started or have many years, even decades, of investing experience. The fact
is, experience is harmful if it continuously reinforces your ongoing bad
habits. Success in the market is achieved by avoiding the classic mistakes
most investors, whether public or professional, make.
Events in recent years should tell you it’s time to educate yourself, take
charge, and learn how to handle and take responsibility for your own finan-
cial future: your 401(k), your mutual funds, and your stock portfolio. These
events include Bernie Madoff’s theft of billions from supposedly intelligent
people through his supersecretive operations, which were never transpar-
ent, as he never told anyone how he was investing their money; the public’s
heavy losses from the topping stock markets of 2000 and 2008; and the use
of excess leverage by Wall Street firms that couldn’t even manage their own
money with prudence and intelligence, forcing them into bankruptcy or
shotgun weddings.
You really can learn to invest with intelligence and skill. Many people
have learned how to use sound rules and principles to protect and secure
their financial affairs. Here are the key mistakes you’ll need to avoid once
you get serious and make up your mind you want better investment results:
1. Stubbornly holding onto your losses when they are very small
and reasonable. Most investors could get out cheaply, but because they
are human, their emotions take over. You don’t want to take a loss, so you
wait and you hope, until your loss gets so large it costs you dearly. This is by
far the greatest mistake nearly all investors make; they don’t understand that
all common stocks are speculative and can involve large risks. Without
exception, you should cut every single loss short. The rule I have taught in
classes all across the nation for 45 years is to always cut all your losses imme-
diately when a stock falls 7% or 8% below your purchase price. Following
this simple rule will ensure you will survive another day to invest and capi-
talize on the many excellent opportunities in the future.
2. Buying on the way down in price, thus ensuring miserable
results. A declining stock seems like a real bargain because it’s cheaper than
it was a few months earlier. In late 1999, a young woman I know bought
Xerox when it dropped abruptly to a new low at $34 and seemed really
cheap. A year later, it traded at $6. Why try to catch a falling dagger? Many
people did the same thing in 2000, buying Cisco Systems at $50 on the way
down after it had been $82. It never saw $50 again, even in the 5-year 2003
to 2007 bull market. In April 2009, it sold for $20.
3. Averaging down in price rather than averaging up when buy-
ing. If you buy a stock at $40, then buy more at $30 and average out your