Bad timing

This is not so much about engaging in market timing as it is being aware of where an investment really is at the moment you buy it.

A key part of my methodology is looking for investments for which a case can be made to buy, but which also carry the very real possibility of taking a dive before they reach their potential. Studies show that investors typically bail out if an investment declines more than 20% from the buying point; even if a stock takes off from there, all the investor experiences is the loss.

Too often, investors look at positives without recognizing the factors that could delay the success they foresee. For example, investors may love the concept behind a popular business, but may not recognize that short-sellers are swarming the stock, or they may see a stock that has fallen into bargain territory without considering what might drive the price down further before it can rebound.

Investors love the idea of “buy low, sell high,” but have trouble executing it -- and they all too often get it backwards.

Even if your investment premise looks right for the long term, it’s important to recognize the detours that could crop up on the path to success. If you don’t, you may not complete the journey.

A never-give-up sales pitch

My very first Stupid Investment of the Week column focused on investment notes from American Business Financial Services, and that firm continued to send me invitations to invest every few weeks, right up until it filed for bankruptcy protection and suspended sales and redemptions for investors.

Likewise, if you request information on the Gerber Life Grow-Up Plan (a lousy life insurance policy for children) or the AARP Guaranteed Acceptance Life Insurance plan (a bad idea for grown-ups), you may be in for receiving mailers until your loved ones are collecting on your life insurance.

Irrational exuberance

This is an extension of bad timing, with more emotion factored in. All too often, average investors find out about an investment only after it has come into vogue, by which time it may be ready to hit the skids. It’s important to remember -- and consider -- that every investment can go wrong, even the ones that appear to be can’t-miss opportunities.

Poor governance, questionable premises

Sometimes, an investment stinks just because of how it is constructed, the style of management or the ethics of the company’s executives. It may be a great marketing idea but a poor investment concept.

These flaws aren’t always immediately evident, but when they surface, they can quickly turn an attractive investment into an ugly situation.

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