They say that the wise man does not just learn from his own mistakes, but from other people’s mistakes.
To learn from the mistakes of others is much less costly than having to learn from your own.
So here are 5 deadly mistakes that I have learnt from the mistakes of others – some of them personal friends and colleagues – which I’d like to share with you.
Mistake No. 1: “I will over-leverage”
Leverage is a great tool to make wealth, when used properly and responsibly.
For example, we all use leverage when we buy a house. We provide the deposit to the bank and the bank provides the majority of the money (the mortgage) to buy the house.
The problem is that some people get overly greedy and lose all sight of the risks.
Two very close and personal friends of mine borrowed quite heavily during the real estate bubble of 2006 to 2007. They bought properties all over London and other parts of the UK. At one point they had nearly 30 mortgages between them!
I should add that these men were NOT stupid. In fact, one of them used to work for one of the top investment firms in the world.
However, 2006 was a crazy period for real estate. Seemed like everyone was making money from it.
Anyway, when the housing bubble eventually burst in 2007, both men were wiped out. One of my friends lost everything for the second time and he had to start from scratch.
This is one of the most important lessons I learnt: leverage is a great tool, but NEVER EVER abuse it.
Mistake No. 2: “The Normalcy Bias”
When the Second World War started, it is estimated that 282,000 Jews had left Nazi Germany by the end of 1939.
However, it is known that 202,000 Jews chose to remain in Germany. Why? According to some historians, many Jewish people believed that Hitler could not possibly get worse than he already was.
Sadly, they were wrong…
This is an example of what psychologists call the “normalcy bias”. When people get used to a certain normality, they refuse to believe that the worse can possibly happen.
This is exactly what happened in 2007. Many people, including personal colleagues, refused to believe that a housing crash was about to happen.
In September 2007 I attended a property seminar in London. I heard the “expert” say to an audience of 200 people: “All those rumours you’ve heard about a property crash is false. It is just fear mongering”.
Like him or hate him, the CEO of Goldman Sachs, Lloyd Blankefein said it best:
“Investors should always prepare for the most extreme risk scenario because it will happen.”
Mistake No. 3: “I’ll buy option contracts”
I have often warned people about the risks of buying option contracts. But it seems my warnings fall on deaf ears.
The buyer of a stock option contract has the right (without the obligation) to buy a certain quantity of a stock at a pre-agreed price by a certain time.
The advantage with buying options is that it allows you to control hundreds or thousands of shares with less money than if you were to buy the shares in the normal way.
The problem with buying options is that they carry a major risk: time decay. Unless you are dead correct about the direction of the market, you will start losing money fast.
In fact, with buying an option, you can still lose money even if the stock goes sideways or goes slightly in your favour.
I am going to say it again:
Buying an option is the devil’s work. It is Wall Street’s evil game against the average investor.
If you want to trade options like the pros, then SELL options – not buy them. When you sell options, the odds are greatly in your favour.
In 2014 I shall do a webinar on the art of selling options.
Mistake No. 4: “I can’t lose”
I once read that one of the best traders in the world sticks a note on top of his computer monitor. The note simply says: “‘Today you’re going to lose, and you’ll lose BIG!”.
You might think that that is negative thinking, and surely not a good idea. But you’d be wrong.
That note was to remind him of the risks involved of every trade and every investment he does.
In the world of trading and investing all that “postive thinking” mumbo-jumbo that some “life gurus” spew out will NOT work!
It does not matter how much you hope one of your trades will do well. The market does not care about your hopes and wishes.
Protect yourself against risk. Plan for the worst because it will happen.
Mistake No. 5: “I’ll pick some stocks”
One of the biggest mistakes I’ve seen people make is choose to invest their money in a stock because they think they know the company well.
Jeff Reeves of Market Watch recently warned that most people simply do not have the ability or the skills to research a stock.
Buying individual stocks without carefully doing your research on those stocks like a professional would do, is one of the biggest mistakes you can make.
This year I did a special 4-hour webinar on “The Ultimate Guide to Stock Investing“. I showed our subscribers some of the best secrets behind picking a good stock and when to buy or sell them.
I highly recommend that you watch the recording of this class before you consider putting your money into another stock. You can get the DVD by clicking here.
Alessio Rastani is a stock market trader at www.leadingtrader.com
Good stuff!