Don't Fall Victim to This Common Investing Pitfall

Written by Matt Harrison
Posted September 17, 2018 at 3:31PM

Navigating the stock market can be a venture full of risky maneuvers. Investors like you and me, we're regular people. We're not perfect. In fact, we may be more prone to pitfalls than the average Joe. Maybe that's just the nature of the work.

People make mistakes. It's a crucial part of education. You won't have any concept of how hot the stove is until your burn your hand. That's how we learn. But if your kid is burning their hand on the stove every week, consistently forgetting how hot it is, you should be a little worried.

I joke, but behaviors that would be a serious cause for concern in children are found too often in adults. You see, adults don't always take the time to catalog and learn from their mistakes.

We all have that friend who's dated 15 versions of the same person, always hoping for a different result. There's your uncle who still hits the casino after all those Gamblers Anonymous meetings. Or that age-old refrain: "I eat because I'm sad, and I'm sad because I eat."

This pattern of mistake-making is called "circular reasoning": a logical fallacy that mankind has participated in since we could swing a club. With circular reasoning, the reasoner begins with the conclusion they're trying to reach. And circular reasoning can be particularly deceptive because it often appears logical — the premise and the conclusion are literally the same.

And there isn't a place where you'll encounter more victims of circular reasoning than in the stock market. It doesn't take long in this game to encounter seemingly competent investors who keep making the same mistakes over and over again...

A Simple Checklist That Could Save You Millions

I've been talking to Charles again. And for your benefit, I'm going to outline some of his simple steps that you can take to avoid these kinds of pratfalls and to ensure financial success.

Charles explained that when it comes to mindful investing, there's a single anecdote you should consider first and foremost. And that anecdote is actually a checklist presented by Warren Buffett at the 2003 Berkshire Hathaway's annual shareholder meeting. Before Buffett makes an investment, he considers these factors:

(a) can I understand it?...
(b) does it have some kind of sustainable long-term competitive advantage?...
(c) how do I feel about the management in terms of their ability and honesty?...
(d) what's the price?...

And if it gets through all four filters, I sign my name to the check.

When I told you that these would be simple steps, I really meant simple. These aren't mind-blowing revelations about a stock's potential. They're just the basic considerations that will keep you from getting into trouble.

But you'd be shocked by how often this kind of caution is overlooked. Investors are so eager to find the next big score that they don't take the time to evaluate the stock they're buying. And that leads to some serious risks.

And contrary to widespread belief, there isn't an inherent risk to investing. Those risks arise when investors act too fast and don't consider the cardinal rule that Charles taught me. Now, this is the kicker... This is the one you'll want to put on your desk, above your bed, or whatever blank space you can fill with sage advice:

"Avoid serious loss because that is the precondition to making high rates of return."

As Charles puts it, the key to making money is simple: Don't make investments in which you stand to permanently lose capital. Don't treat the stock market like a casino — you don't have to. If there's a chance that you may lose more money on an investment than you could gain, don't get involved. In even simpler terms, here are Park Ave Digest's rules for investing:

  1. Don't lose money.
  2. Never forget rule No. 1.

Now, I know that's a bit of circular reasoning that I warned you about earlier. But like I said, sometimes it's completely valid. It was through this mindset that Charles amassed his fortune.

It may seem like obvious information. But it's much harder to practice when the whistle is blowing and everyone's whispering that this long shot stock is a "sure thing." Do your research, understand what you're buying, and don't take unnecessary risks.

And if you're wondering where I'm getting these rules of engagement from, look no further than Charles Mizrahi's new book, Hitting Wall Street's "Fat Pitch": Secrets from a 35 Year Stock Market Insider. For a limited time, he's giving it away for FREE. You only have to pay for the shipping and handling. At $4.95, you can't afford to miss this opportunity.

Reserve your copy here.

This book has entirely changed the way I invest. But there's one more opportunity that I'd be absolutely remiss if I didn't mention...

On September 27th, Charles is going to be presenting the Insider Fortunes Summit. During this webinar, he'll be covering his latest strategies and the stocks that will be making the biggest moves in the coming months.

Once we have more information, we'll send it to you so you can reserve your spot.

Invest well,

Matt Harrison
Contributing Editor, Park Avenue Digest

Comments

Report: The Real Secret of the Stock Market
And 3 Stocks for Getting Started