Mistake 19
Conflating trading with investing – focussing on charts and price action.
Human beings are visual creatures.
Of all our senses, we rely on seeing things.
For us, “a picture indeed speaks a thousand words”.
We find a simple chart or graph much easier to understand, compared to rows of numbers or details that are hard to quantify.
Plus, we all like the possibility of a quick buck, over waiting months and years for a pay off.
That is why many stock market players love to look at price charts and try to figure out what can happen next.
They usually rely on recent TRENDS as their friends in the endeavor.
They draw lines and moving averages to “bet” on when there would be a reversal of price movement – support and resistance points – so that they can profit from them.
But alas, for most of them, this is like imagining animal shapes among clouds in the sky.
The market can change its direction at any time, without warning – which can cause all the little trading gains to be wiped out within minutes.
Numbers, math, calculations, investigative research, and hard logic are not entirely native to many of us.
But those are precisely the skills that smart, successful investors require.
Mistake 20
Not understanding TVM, CAGR, DCF, IRR, and other vital financial math.
“Time is money” as the wise saying goes. But how does one quantify time? There are logical formulae for most investment decision making. The most important one is that of compound interest. This is a family of calculations that help us arrive at the value of something in the future, in today’s dollars. These include time value of money (TVM), discounted cash flow (DCF), internal rate of return (IRR), and compound annual growth rate (CAGR). These calculations crunch relevant input parameters such as time period, interest rate, expected cash flows, market price volatility, risk probabilities, and assumed rate of inflation. The result is meaningful figures that give us clarity to make our choice of action – such as buying, holding, or selling – much easier. After all, most value investors see their work as “time arbitrage”.
Mistake 21
Not understanding the “language of business” i.e. the basic terminology, lingo, vocabulary and concepts of accounting, finance and investing.
To navigate the waters in any area, it is of immense benefit for us to know the words and ideas that people use in it. This applies both when visiting a new country or being profitable in a new industry. Best if one can take some time and tutelage on this most vital knowledge well beforehand. It may take a month or two, but this simple pursuit will save us many missed opportunities, all the while making it easier for people in that field to help us out as well. Simply put, it empowers us while opening doors for us efficiently.