Knowing how to avoid common mistakes investors often make is part of learning how to develop good investing strategies and skills. Here are a few mistakes you should avoid; or if you are already employing them, stop immediately.
Invest in rapidly expanding financial institutions
Warren Buffet once made a remark that a bank manager that is bad can flush all of your equity down the toilet during your lunch hour. When you think about how the banks do business, it's easy to see why he would say that. Borrowers are given loans and interest rates between 1% and 5% depending on how much risk is involved. The financial institution might make a margin of that 1% to 5% each year, but if a loan goes bad and does not get repaid then the bank loses 100%. That risk needs to be managed very, extremely carefully.
Even if you watch the ratios like a hawk you can still fall victim; a bank can temporarily hide its bad loans under a smokescreen of growth. If a bank has had a number of loans go bad, it can simply double the size of the loan book. The new loans will make the bank look good temporarily, but the poor quality of the loans that were made in haste may end up costing the bank more in the long run.
Buy the 'gunnas' rather than the 'doers'
The 'Gunna' are companies that say they are 'gunna' do things. These are unproven companies that are a fantastic avenue for losing capital. Even the more experienced and well-established companies can become 'gunnas'; the management team will simply explain away their company's bad performance within the past few years to concentrate on one it will be doing in the future. This sounds great on the surface, but the chances are good that a similar situation will arise in the near future and more promises will be made with the issues getting swept under the rug.
Avoid these and other mistakes by finding out some great tips and advice for investing from an expert in the business.
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