The purpose of joining or forming a Chama is to make money through the pooling of monies from all members then investing it for monetary gain. Since we are in the business of investment, it is important to keep in mind that all investors make mistakes. Yet, these mistakes may benefit us in the future, as we utilize our knowledge to make better and more informed business and investing decisions even if they cost us money the first time around. Like the advice from our parents, we must often experience it ourselves before we truly learn from them. The truth is, investment mistakes can be very painful and though we learn from our mistakes, it can set us back and keep us from attaining our financial goals. Thus, the trick is figuring out what our investing mistakes are — and then trying to avoid them.
This is really means overconfidence. Psychological studies have shown that when you ask people if they think they have the ability to pick stocks that will have high returns, men tend to say yes more often than women. It’s not because men are so smart. It’s because men are unrealistically optimistic about their abilities. This quality is great for job interviews, where you need to stand out from a crowd, but lousy for investing. “When you are unreasonably optimistic in the stock market,you are just readying yourself for an accident. Thus it is always better to be cautious when investing in the stock market.
Blinded by Reward
Being blinded by the possible rewards of an investment can lead us astray when it comes to the associated risk of that same investment. Hearing others speak of amazing dividends, huge returns, and immense profit taking can leave us rearing to jump into an investment without considering the risks involved. You must often step back for a moment and consider just why the payoffs are so high for a particular investment, and then decide whether the risks of such payoffs are worth what might only be a fleeting reward.
Impatience has been the killer of many wise investments. Not waiting out a downturn in the economy or assuming a stock has seen its prime and selling it too soon, even though it’s a well-known and stable investment, could leave you with regrets. As an example, one Chama invested in a certain bank’s stock. This Chama had bought their shares at Kshs.10/- each. When the stock reached Kshs.14/- and stabilized for several months, some of the Chama members lost faith even though everyone knew the stock was a rock solid investment. The Chama didn’t need the money, but the impatient members kept grumbling and pushing the rest of the members to pull out of this investment. Eventually they managed to convince the whole Chama and dumped the stock, took their profits and several years later this bank was bought out, their stock selling for over Kshs.40/- a share. Impatience got the better of this Chama and they lost out big time.
A bursting investment bubble can make your Chama lose money. Not seeing the fall of a particular investment or investment area in time can leave you in a precarious position. During the last decade, areas such as real estate and technology have shown us just how dangerous bursting bubbles can be. When people start saying an investment is fail-safe or bound to make you money, it’s a good idea to start questioning the soundness of such advice. Remember the old adage, “If it sounds too good to be true, it probably is.”
Low Capital Investments
Sometimes it’s not that we don’t make the correct decisions, but when we do, we don’t put enough money into the pot to make the decision worthwhile. Purchasing 10 shares worth of stock when the stock price is Kshs.10/- a share, even if the investment takes off, might not make a significant difference in your overall Chama portfolio.
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