What's the biggest mistake that stock market investors make?

Over the years, many forms of research and analysis have helped develop different investment strategies. However, many retail investors use intuition and baseless practices, while investing. This can be prove to be harmful. We at William O’Neil India, make use of fundamental analysis and technical analysis, to predict stock breakouts and make wise stock market predictions. Here are some of the common mistakes that investors make :

1. Buy stocks at a low price and sell at a higher price

Buying stocks at a low price infers that the purchase was made when the stock was weak. A weak stock very rarely tends to rise back up significantly. Many investors tend to buy a stock when the price is low, hoping it will rise in the near future. Although at times this may work, the investor usually ends up in a loss or with very meager gains. We at William O’Neil India believe in buying stocks at a high price and sell at an even higher price. Using our CANSLIM investment strategy, we predict stocks that are ready to breakout and invest in them, regardless of how high the price is. This is because, at breakout point, a stock is bound to skyrocket. Always invest in leading stocks at or near its 52 week high.

2. Buy and hold stocks for a long time

Many retail investors tend to buy and hold on to blue chip stocks for long periods of time. Most blue chip stock price charts remain horizontal without too many significant rises. This results in very poor profits. Instead, one must try to buy and hold on to a leading stock for the run, and then sell. An average leader’s run lasts for around 12-18 months. Investing in these stocks at the beginning and selling them once they have made profits of around 20-25% is the best method to go about growth investing, and ensuring high profits.

3. Buy stocks with low price to earnings (P/E) ratio

Never use P/E ratios to buy stocks. If a certain stock’s P/E is low, many investors tend to believe they’re buying good stocks, at a low price. However, nothing good is ever cheap. If a certain stock has a low P/E ratio, there’s an underlying weakness behind it. A low P/E ratio should usually be treated as a red flag.

4. Buying stocks based only on fundamentals and not chart data

Charts are an essential tool to time your buys and sells perfectly. Charts provide investors information regarding institutional demand, overall stock health and the best times to buy and sell stocks. Our product, MarketSmith India makes use of seven different chart patterns, to pinpoint the best time to buy.

5. When the market is in a downtrend, it’s a good time to find bargains

Investors tend to believe a downtrend in the market is the best time to buy stocks at a cheaper price. Our research shows that three out of four stocks follow the general market direction. Trying to outsmart a bear market is not a good idea, as the odds are not in your favour. During a market downtrend, it is best to stay idle and wait for the market to recover, to start investing again.

We at William O’Neil India believe that facts and research trump "conventional wisdom". Conventional approaches may work sometimes, but investing with a fact based system of proven rules will increase your chance of success. For more stock market tips, visit www.marketsmithindia.com.

MarketSmith India is an investment advisory product based on William O’Neil’s Can Slim method with model portfolio, pattern recognition, idea lists powered by institutional quality data