Dear Fellow Investor

The Internet has made the whole process of investing a lot simpler but it has not necessarily made it easier for investors to make money.

Contrary to what a lot of investors may think the same rules of investing still apply in spite of it being cheaper and easier to buy and sell securities.

All things considered investing online has probably brought as many negatives as what it has made our investing lives easier.

I have put together the main mistakes made by online investors I have discovered through experience, assisting subscribers and working with other investors

I hope it helps you with your investing.

Here is my list…

Trading too much

The biggest advantage of online brokers is the ease with which you can buy and sell securities. 

Everything from stock, bonds, preference shares, and you name it, can be bought and sold at the click of a mouse.

This has made it so easy to buy and sell securities that it has become a negative rather than a positive.

I am not a big believer in trading investments.  Believe me if I could I would, but I have tried it and I did not work. 

My answer to any investor is that the recipe for investment success is to find undervalued investments analyse them, and then invest.

Returns from undervalued investments are made while you sit tight waiting for the undervaluation to be discovered and the investment to be revalued.

If you buy and sell too often the only person that is going to make money is going to be your broker irrespective of how cheaply it executes your trades.

Checking your portfolio all the time

The Internet makes it so easy to keep track of the minute by minute movements of your portfolio and a lot of investors do it without thinking.

It is tempting to know what your investments are doing all the time but it is unlikely to improve your investment returns. 

In fact studies have shown that the returns of investors actually go down the more often they look at their portfolios.

This is mainly because the daily movement of your portfolio is mainly noise as it cannot be linked to any specific information.

Market commentators always seemed to have a ready answer as to why the markets are higher or lower, and their answers are convincing. 

The only problem is they are as clueless as we are as to the cause of the movements. The only difference is that they sound convincing and give a reason that seems plausible.

I check my portfolio on a daily basis. 

In the morning before the market opens to record the portfolio value (I have resorted to tracking my portfolio performance in the same way as a unit trust or mutual fund does as I have found this the most accurate) and once or twice during the day to see if there has been any major movements where I need to look for company specific news.

A few times a day I check the movements of shares on my watch-list. Mainly to also look for company specific news but also to identify possible buying opportunities because of sudden price drops.

For the rest I avoid any general market information and financial television as this leaves me more time to research new investments.

Selling your winners and holding your losers

This mistake is probably as old as investing itself but in spite of the advantages offered by online investing it hasn't gone away.

Investors that invest online have great tools available to limit losses through automatic stop loss orders but have largely failed to put them to use.

Automatic stop losses are controversial but as I explained in the article Do you know the first rule of investing?

I am a supporter of following a strict stop loss system of risk control. Letting your winners run and getting rid of your losers is a great strategy for long-term investment success.

Experience has taught me that most of my really good investment ideas paid off right from the start. And my past returns would have been a lot higher had I implemented a strict stop loss system earlier.

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The get rich quick idea

Getting rich quick through the stock market is not a new myth. However online investing, the internet bubble, or both seems to have given it new life in the form of day trading.

As I have said above I would have loved to be able to trade my way to riches but I've just not been able to do it. 

Sure I have had some short-term profits but it has been the exception rather than the rule.

Successful investing is the implementation of a proven investment process over a long period of time which, because of its proven track record, guarantees you success.

Short term trading has no track record that I could find, and thus no reasonable chance of being successful.

You can read more about the investment process in my article The best investors have this... Do you?

Following the media

The whole idea behind financial media is to get you to start watching and to keep you watching.  They make money through advertisements and the more people they have watching the more they can earn.

It is thus highly unlikely that anybody in the financial media has got any interest in increasing your investment returns.

As I said above, financial television has an explanation for every market movement which is highly unlikely to be correct or even if it was it would be too late you do anything to make any money from it.

They love talking about what I call yo-yo news, what has gone up or down.  Also company’s hitting new highs or, are subject to exciting upward developments, are most likely to feature.

If you want to increase your investment returns the best way to go about it is to do the exact opposite from anybody else.

Investing against the crowd in unknown companies that are undervalued, the ones I recommend to my subscribers, is a far better way to make money.

Keeping your emotions under control

This point has a lot to do with the point Trading too much but it is so important I wanted to mention it separately.

Online investing because of the instant feedback we get in terms of gains or losses put a lot of stress on risk averse and emotional investors.

If you are likely to calculate the amount of money you've lost with the movements of any of your investments you have most likely taken on too much risk or you have invested money you cannot afford to lose.

The one thing about investing that I can say with 100% certainty is that there will always be some investments that you will lose money on.

If you have problems sleeping or if you feel uncomfortable with any loss situations on your investments you should either reduce the size of your investments or you should invest in less volatile companies or through funds.

Accepting responsibility for your decisions

This may also seem rather obvious but can cause you lot of problems.

When investing online you decide, you decide to buy or sell after you have done the research. 

It is thus of little or probably negative use blaming any losses on somebody else.

As soon as you do that you take away your decision making power and the decisiveness you need to limits losses or take profits.

Not doing enough research

All the information available on the Internet has led us to literally drown in it. You can most likely find an opinion on any investment in the Internet, buy or sell.

The risk lies in the possibility that investors see the reading of a few such articles as the only research they need to do.

Over time I have put together a structured research process that works through a checklist to ensure that I do not miss anything important.

For more information see the article What does your investment check-list look like?

Relying on someone else’s research is unlikely to be as thorough as your own investment process.

It is also important to avoid the temptation to first look for research on the Internet, and then with this possibly wrong or biased information in mind, try to form your own opinion.

These are the important mistakes made by online investors I have come up with.

That said I would be the last one to give up the benefits of online investing; real time prices, buy and sell volume, and the ease of entering orders, stop losses and watch lists.

I am sure there are some points I have missed.

Should you have a good one please send it to me through my contact page and I will included it in the article.


Your online analyst


Tim du Toit

P. S. You simply have to invest when you find a good company in the software industry.

Here’s why.

A software company, once its development and fixed costs are covered, generates just about pure profit on each additional sale as the cost to produce an additional CD is virtually zero.

This month I stumbled onto exactly such a company when searching for an investment to recommend to my subscribers.

The company is trading at a price to earnings ratio of under 12. I agree this does not seem like a bargain but remember 2009 was a difficult year for all companies.

The company is even cheaper based on its price to free cash flow (operating cash flow minus capital investment) of 8.7 times. This means the theoretical dividend the company can pay with the cash it generates is nearly 11.5%.

The only valuation measure (I look at 7) the company is not cheap on is its dividend yield of only 2.1%. This is due to it using cash to pay down debt taken on to pay for an acquisition.

But as the debt is nearly all repaid there is a lot of room for a substantial increase.

To find out how you can also get ideas like this monthly click here.