The Five Rules for Successful Stock Investing 3

Seven Mistakes to Avoid

Unless you know how to avoid the most common mistakes of investing, your portfolio's returns won't be anything to get excited about. You'll find that it takes many great stock picks to make up for just a few big errors.

Loading up your portfolio with risky, all-or-nothing stocks – in other words, swinging for the fences on every pitch – is a sure route to investment disaster. For one thing, the insidious math of investing means that making up large losses is a very difficult proposition – a stock that drops 50 percent needs to double just to break even. For another, finding the next Microsoft when it's still a tiny start-up is really, really difficult. You're much more likely to wind up with a company that fizzles than a truly world-changing company, because it's extremely difficult to discern which is which when the firm is just starting out.

You have to be a student of the market's history to understand its future. Any time you hear someone say, "It really is different this time", turn off the TV and go for a walk.

It seems entirely logical, but the reality is that great products do not necessarily translate into great profits.

It's very tempting to look for validation – or other people doing the same thing – when you're investing, but history has shown repeatedly that assets are cheap when everyone else is avoiding them.

You'll do better as an investor if you think for yourself and seek out bargains in parts of the market that everyone else has forsaken, rather than buying the flavor of the month in the financial press.

Market timing is one of the all-time great myths of investing. There is no strategy that consistently tells you when to be in the market and when to be out of it, and anyone who says otherwise usually has a market-timing service to sell you.

The only reason you should ever buy a stock is that you think the business is worth more than it's selling for – not because you think a greater fool will pay more for the shares a few months down the road.

Cash flow is the true measure of a company's financial performance, not reported earnings per share.

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