top 3 mistakes investors make

I've been tagged by fellow blogger Dividends4Life to list my top 3 investing mistakes. I believe some bloggers have described 3 investing mistakes they've personally made, while some have described what they believe to be the top 3 mistakes that are generally made by investors. I've decided to keep in general.

Top 3 Mistakes Investors Make

• Failure to Focus. Just by observation I can say that many investors lack a coherent focus to their strategy and their habits. Investors need to define their strategy based on their time horizon, skills, beliefs, and life situation. Once that strategy is defined, investors should stick to their system long term and not waver back and forth between strategies and investment ideas/styles. This type of back and forth tends to lead to high trading fees, high expectations in short time periods, and low success rates long term.
• Unrealistic Time Horizon Expectations. Unless you are a trader, equity-based investments should be held for the long term (5 years+). Shorter term (1- 4 year) investments should be diversified in vehicles such as bonds, high interest savings accounts, and money market funds.
• Failure to Recognize the Equality of 'Investments'. Real estate is to stocks, as stocks are to fine art. Investments come in all shapes and sizes. One can compare the characteristics and fundamentals of investments and the markets they function in. There are far too many people who generalize and believe real estate is 'safer' than stocks. The real estate boom and bust in the U.S. should have revealed the equality of all investments to us all.

my Walgreen mistake

As many readers of the moneygardener know I have a long position in U.S. drugstore chain Walgreen (WAG). I first bought shares in Walgreen on January 29, 2007, over one year ago, when the stock was trading at around $45. In October WAG announced a bad quarter, and investors dumped the shares hard. The day of the dramatic drop I actually doubled my position in the stock to average my cost down. This was a mistake!

Was this a mistake because Walgreen is a poor company, with a sketchy future? Absolutely not. I still believe shares of Walgreen should be a phenomenal investment long term. So why was averaging down on the day of that dramatic 15% drop ($47 to $40) a mistake?

The reason I believe this was a mistake, but a mistake I will learn from is:

• This trade exhibited my lack of patience, as an investor

Why I thought I needed to average down so quickly when they announced that weak quarter, is a mystery when one looks back at it now. Yes hindsight is 20/20 but, in reality, I made the trade in fear that WAG would bounce back up to $43 or $44 very quickly, when investors came to their senses. It showed overconfidence on my part that I thought I knew more than the market. No one becomes enamoured with a good growth stock, just after they report flat earnings. In reality I had months to watch the stock and average down. I've been kicking myself over the past few months as shares of WAG have drifted down to a low of $32.50. I could have got them 19% cheaper than my averaged down price, if I could have shown some patience.

• Why catch a falling knife when you can buy a stock on the rise later?

The interesting fact is that what I thought was such a great deal at a 15% discount at $40/share back in October, has been down to $32.50 and has now bounced back to today at over $37. It is my belief that Walgreen has now bottomed. If I would have just waited until all the pessimism was wrung out of the stock, even if I didn't catch the bottom I could have bought it today 8% cheaper, and on the rise, instead of reaching for that falling knife.

The good news is that over time, this should all be water under the bridge as I expect my shares of Walgreen will appreciate smartly over time. I want to try to learn from experiences like this as I continue on my quest to buy great companies, that pay growing dividends, at reasonable prices.