Top 3 mistakes I made while building a 7-figure stock portfolio

I have been investing in the stock market for a decade since the day I landed my first job.

Although my portfolio has grown (investing early and consistently definitely helps) with a 200% return on capital invested, I have also made a lot of mistakes and detours from the high road to financial success.

I recently took a look at all my stock transaction records to reflect on my journey. I found a ton of lessons that I wish I would avoid from day one.

Let me share my top 3 mistakes today.

Mistake #1: Thinking that we could easily beat the market.

As of February 2024, the S&P 500's average yearly return over the last 20 years is 9.74%, assuming dividends are reinvested.

At a 9.7% annual return, you could double your investment in every 7.5 years.

Not many professional fund managers are even able to match this result.

But somehow retail investors like my younger self have this illusion that I can easily pick the right stocks that will outgrow the market. We completely ignore the power of indexing (buying shares of a basket of companies, like the S&P 500).

Legendary investors, like Warren Buffett and Howard Marks, would agree that for the majority of investors, indexing is the most rational and simplest strategy of all.

If you haven't already, I suggest that you take a look at your portfolio and check your annual rate of return since the day you started investing, and you may realize like me how arrogant I was to think that I could do better than the market by stock picking.

Mistake #2: Confusing Price with Value

"Price is what you pay and value is what you get."

This is the teaching from one of my investing mentors. It's a simple way to understand the differences.

But after more than a decade of investing, I still caught myself confusing "price" for the "value" of a company.

Large stock price movement could happen within a day, a few hours or a few minutes.

But we often forget that we are not simply buying and selling pieces of paper.

Underneath every transaction, there is a real business operating on a day-to-day basis irrespective of stock prices.

And that business has real business equity value.

If we do not have a clear understanding of how to evaluate the true business values of a public company, then what we are effectively doing is buying and selling stocks based on our emotional reactions to these "price" movements.

Not knowing how to value a company is the biggest mistake retail investors make.

Combine this with the over-confidence in beating the market, it's like saying everyone could step into a race car without proper training and win an F1 championship.

Mistake #3: Buying / Selling Stocks from Tips.

Without the skill to evaluate the business value of a company, we find other shortcuts to convince ourselves that we are still making rational decisions, e.g. watching YouTube videos on why we should buy into NVDA now, listening to tips from friends...

Too often, retail investors choose to buy or sell stock from tips they receive.

We act on tips (be it from professionals or friends) because we think that tips are our competitive advantage against other investors. Only to end up with a bunch of lost-making stocks we don't know well in our portfolio.

If investing is that easy, everyone should be successful in the stock market given how accessible information is today.

Instead, we should be focused on learning to value a company's worth and making independent judgement about every investment decision.

This is what would help us truly invest into high-quality businesses that would help us grow our long-term wealth.

If these mistakes resonate with you, stay tuned for more hard-earned lessons!