Everyone makes mistakes when investing.

In fact, some of the most famous investors of our time have screwed up so bad, they were left scratching their heads. But as many will teach you, success comes from failure.

As referenced by Investment Masters Class:

  • “A man who has committed a mistake and doesn’t correct it, is committing another mistake.” Confucius
  • “With the good men, you can see the learning juices churning around every mistake. You learn from mistakes. When I look back, my life seems to be an endless chain of mistakes.” Adam Smith, The Money Game
  • “I don’t revisit mistakes to bewail them, I revisit them for their learning purposes.” Charlie Munger
  • “On average, I think people beat themselves up too much over their mistakes. I don’t think it’s that productive.” Warren Buffett
  • “There’s an old saying in the investment game: ‘It’s okay to be wrong: it’s not okay to stay wrong.’” Scott Fearon
  • “The big difference between those who are successful and those who are not is that successful people learn from their mistakes and the mistakes of others.” Sir John Templeton

Or, as pointed out by Think Advisor:

Stanley Druckenmiller “was one of the best macro investors of all time, reportedly making about a 30% return for 30 years. He invested in things like bonds and currencies. But in the late 90s, he got caught up with what was occurring around him, and he bought tech stocks — a lot of them — at the very top. He lost about $3 billion in six weeks.”

Failure often creates the building blocks for future success.

Unfortunately, some of us are gluttons for punishment, and make the same errors over and over… and over again. Here are some of the top ones to avoid,

Wacky Mistake No. 1 – Investing in the Wrong Stock

Believe it or not, investors have been known to buy the wrong stock.

In 2021 for example, Tesla CEO Elon Musk told Twitter followers to “use Signal,” which was supposed to be a reference to Signal encrypted messaging app.

Thinking Musk was referring to Signal Advance (SIGL), investors piled in.

Within days, they would send a thinly-traded stock – with no revenue – from about 60 cents to $70.85, and gave it a $3 billion valuation – even though Signal Advance had absolutely nothing to do with Elon Musk’s tweet.

Imagine making an 11,708% return by mistake…
In 2019, investors bought the wrong Zoom stock. Instead of buying the correct ticker, ZM for Zoom Video Communications, they bought shares of Zoom Technologies.

Whoops! As reported by Time at the time:

“Shares of Zoom Technologies Inc., a Beijing-based maker of mobile phone components with a market value of just $18 million, have more than doubled this week as investors bet on companies that could benefit if coronavirus fears push people to stay at home.”

“There’s just one problem — its ticker is ZOOM, but investors may be thinking of California-based Zoom Video Communications, known for its online video-conferencing platform that could help people work and study from home. That company’s ticker is ZM, and its shares have risen about 11% this week amid widespread market turmoil.”

It happened with Twitter, too.

Before the social media stock began trading, investors jumped into TWTRQ thinking it was Twitter. Investors piled into the TWTRQ stock at less than a penny, and within hours ran it up more than 1,800%. There were just two problems. One, Twitter was using TWTR, and wasn’t set to IPO for another month.

But that’s what happens when you get caught up in a herd mentality.

Thinking the herd must be right, other investors pile on. And while a simple mistake can be very profitable for some, once the mistake is uncovered, there are always bag holders.

Wacky Mistake No. 2 – Following the Herd

One sheep jumped off a cliff. Another followed. All of a sudden, hundreds of sheep began jumping off a cliff because everyone else was doing it.

Jaws on the floor, shocked shepherds would watch 1,500 sheep jump off the cliff. That’s a true story, by the way.

Hundreds of sheep perished. Each followed and jumped simply because every other sheep was doing it. And as uncommon as this may sound, it’s not. In fact, this very same thing happens each and every day among traders and investors.

We buy because everyone else does. We sell because everyone else does.

But we never question what we’re really buying or selling, which can be quite costly. Instead, we take the leap simply because everyone else is doing it.

And if everyone else is doing it, it must be right. Right? Not exactly.

Remember, “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, and one by one,” noted Charles Mackay in Extraordinary Popular Delusions and the Madness of Crowds.

Granted, that was written in 1841. But what he had to say about the mass mania and the behavior of the crowd remains relative to this day…

That need to keep up with the pack could hurt you financially in the long run, though. “That herd mentality instinct is the one that hurts investors the most, especially during bubbles” says Brad Klontz, a financial psychology professor at Creighton University, as quoted by CNBC. “If you think you’re immune to it, that’s when it’s the most dangerous.”

We saw it with meme stocks, such as GameStop and AMC Entertainment, for example.

Wacky Mistake No. 3 – Investing without a Stop Loss

Believe it or not, there are many investors that don’t use a stop loss. That can be costly.

For example, my buddy Brad turned $2,000 into $15,000 with Bitcoin at one point. Not only did he not pull any money off the table from the win, he never set up a stop loss.

So, when Bitcoin plummeted, so did Brad’s investment… to less than $2,000. To say his wife was furious was an understatement.

It’s just an insurance policy in case your stock pulls back too much. It also protects you from losing too much money. Some traders use a -25% stop loss for example. If the stock falls 25% from your buy-in price, the stop is triggered and the trade is over.

Investors can also use a trailing stop loss.

What’s nice about this one is that it removes all emotion from the trade. If your stop is hit, you’re out automatically. There’s no second-guessing. If your stock pushes higher, the trailing stop resets higher, too, never triggering until it plummets.

With a trailing stop, if my trade drops by let’s say 15%, I’m automatically stopped out, no questions asked. Now, if the stock continues to move higher, my stop is never triggered. It allows unlimited capital appreciation.

As long as a stock keeps going up, the trailing stop will never get triggered.

Such a stop keeps us from selling our stocks at the wrong time while in a solid uptrend, while preventing losses from wiping out your portfolio. Basically, it forces a stock to be sold. No emotions. No fretting. It’s all automatic.

This strategy keeps you in winners and gets you out of losers. And over time will go a long way to making you a much wealthier investor.

Wacky Mistake No. 4 – Investors Risk Far More than They Can Afford to Lose

Another friend of mine once made 325% in a week’s time on a trade.

Then he risked it all on the very next trade that cost him 90% of that 325% winning, telling me, “Bro, it’s a sure thing. Jump in, too.”

That’s a recipe for disaster.

For one, no stock, no ETF, no option is ever a sure thing. It does not exist. Two, before you invest in a stock, know how much you can afford to lose on that trade. Set parameters for every trade. The last thing you want to do is risk the house, and then lose the house.

According to The Balance:

“There’s a natural human tendency to want to overreach, put in more money than you can afford, and go for a huge payout. This trait tends to become magnified in the face of losses. This is referred to as the “sunk cost fallacy”—the belief that you’ve invested too much to walk away. Rather than selling in the face of losses, someone might hold on to a stock that’s underperforming or, worse, buy more.”

Before investing, find your number.

You can ask investment experts. You can take surveys. But if you really want to find your own risk tolerance number, ask yourself. If you can’t afford to lose $20,000 on a trade, why are you risking that much?

Wacky Mistake No. 5 – Trading on Emotion

Earlier, we noted:
Stanley Druckenmiller “was one of the best macro investors of all time, reportedly making about a 30% return for 30 years. He invested in things like bonds and currencies. But in the late 90s, he got caught up with what was occurring around him, and he bought tech stocks — a lot of them — at the very top. He lost about $3 billion in six weeks,” as reported by Think Advisor.

Turns out Druckenmiller said he traded on emotion and got carried away. He got caught up in his emotions… and lost big.

Emotional trading is when a trader allows personal feelings to impact their decision-making. Sometimes it can be helpful, but oftentimes bringing emotion into trading is a bad idea.

Instead, do your best to remove all emotion from your trading. That doesn’t mean you have to have ice flowing through your veins. It simply means you need to re-think your strategy. No matter what your emotion says, never allow emotion to dictate your trading action.

Especially panic.

When we panic, most of us get irrational. We sell everything, and forget markets are resilient even in times of absolute chaos.

If you panic, you sell. And if you sell, you miss the potential for the recovery rally.

We have to remember that markets are resilient and eventually recover, as they have historically. In fact, look back at the history of bad moves and you’ll see that each time they were followed by a recovery rally.

Days after the cowardly acts of September 11, 2001, the S&P 500 fell from highs of 1186 to less than 985 – a loss of 17%. By December, the S&P regained 1173.

On March 11, 2004, a commuter train bombing in Madrid left 191 people dead. Spain’s IBEX 35 fell from highs of 8204 to less than 7681 in a day. By April, it regained highs of 8,478.

In 2008, markets sank from more than 10,000 to a low of 6,500 before the Fed stepped in, sending markets to all-time highs.

After the Boston Marathon bombing of 2013, the S&P 500 lost a bit more than 2% of its value. The market recovered that lost ground in two weeks.

We’ve seen similar resiliency in Mumbai train bombings, Tokyo subway attacks, the London bombings of July 7, 2005, and the USS Cole bombing, among others.

While none of us can accurately predict the severity of reaction to any events, history has proven that sell-offs have been consistently short-lived.

By removing the human emotion from a trade, the better your portfolio can perform.