How to Fail as an Investor

Don’t let the title of this post throw you off, because I’m going to engage you in a bit of reverse psychology.  Sometimes, a great way to do something right is to instead learn how it’s done wrong and then do the opposite.

A few years back, a friend of mine who knew that I was into stock investing asked me if he should get into it as well.  My first suggestion was that he absolutely not, foolishly assuming that my failure as an investor to that point automatically meant that somehow everybody else was destined to fail.  But sensing that nothing I would say would dissuade him, I half-jokingly replied, “If you do everything opposite to what I’ve done, you’ll probably do just fine!”

At the time, before I learned what has since drastically improved my investing success in the past couple of years, I had essentially become an expert in how to lose money through stock investing.  If there was a way to lose money, I had probably done it.  The truth was, I was more engaged in gambling than investing.

But now that I’ve practiced the opposite for nearly two years and seen a literal 180-degree turn-around in my success, I can say with surety that, if you do the opposite of what I’m about to suggest, you will probably do just fine!

However, I’m going to put a bit of a twist on this.  First, I’ll present a lie that caused me to be a failure, then I’ll present the truth I learned (often the hard way) that has created success.  Here goes:

You can’t learn from big-time investors

Guys like Warren Buffett, Benjamin Graham, and Peter Lynch are in a way different league than us ordinary investors.  They’ve had tons of money to ‘play’ with.  What could we possibly learn from them that could actually help us?

TRUTH:  Warren Buffett bought his first stock at age 11, and I can assure you that it wasn’t a multi-million dollar transaction.  He even learned a valuable lesson about buying and holding after selling it too soon and watching the price surge after he did.  If you read Lynch’s classic, “One Up on Wall Street”, you’ll read that his beginnings were pretty ordinary as well.  We all have to start somewhere, and these people have been gracious enough to share how they started out.  The smart investor studies their stories and learns from them.

Don’t waste money on stock recommendation services

Some of these services cost several hundreds of dollars per year!!  Over several years, imagine how much of that money you can put toward buying stocks!

TRUTH:  Stock recommendation services (offered by the likes of The Motley Fool, Cabot Wealth Network, and others) that you subscribe to online are the best resources for people like me who choose to do self-directed investing, i.e. not seeking advice from an investment advisor at a bank or brokerage or investment firm.  These services are perfect for guys like me who need a starting point in their research.  They’re in the business of finding the best stocks out of the thousands in the various markets.  Unlike some investment advisors, they aren’t recommending stocks whose commissions only benefit them.  Services with a great track record have produced great returns for those subscribers who’ve followed their advice.  If they didn’t, they could not justify their subscription fees and investors would not be recommending them.  My returns to date have far exceeded anything I’ve ever spent on subscriptions, many times over in less than only two years.  They have also far exceeded the returns I used to get when I had an advisor at an investment firm and especially when I was seeking no outside advice at all.  (DISCLAIMER:  Not all advisors or firms are bad.  If you choose to go that route, do your homework until you find a good one!)

Buy only cheap stocks

Penny and small-cap stocks are the best.  A stock worth 50 cents has way more of a chance of doubling than a stock worth 50 dollars.

TRUTH:  I’ve learned that in many cases with stocks, you get what you pay for.  There’s a reason why the Amazons and Apples and Googles and Netflixes and Markels and Pricelines are hundreds of dollars per share (or once were before stock splits).  These are quality companies with ridiculously fantastic track records.  They’re like the luxury cars of the stock market.  Conversely, there’s a reason why the 50-cent stock is a 50-cent stock.  They’re like the junky, dollar-store trinkets of the stock market.  The 50-cent stock has little or no track record to go on, so it’s a lot riskier investment.  It may go somewhere someday, but people aren’t bidding up the price until it proves something, and the smart investor is avoiding it until it does.  As for growth potential, some people thought Apple shares were too expensive 10 years ago at $50, but then they went up to over $700 per share before they were split 7-to-1.  That’s one of many examples that prove a more “expensive” stock can still double and even multiply.

Sell a stock after it’s gone up a few percent

If you don’t, what happens if it drops below what you bought it at?

TRUTH:  Ask the opposite question:  what happens if I sell and it continues to shoot up and even multiply many times over?  I used to get jittery about a stock that went up a bit, fearing an eventual loss.  This proves first of all that I wasn’t confident to begin with because I hadn’t done much homework on the company.  Also, if I did have a winner, I missed out on large future gains by selling too soon.  Take a look at the stock charts of great companies like Netflix, Disney, Tesla, Markel, Under Armor, etc.  What would have happened if you had bought one of them five years ago and sold a few months later versus selling it today?  As for the stock that drops …

Sell a stock at the first sign of trouble

Do this especially if it’s down several percent.  There’s no sense holding onto a loser.

TRUTH:  Is the stock really a loser?  It isn’t if the price dropped simply due to temporary market emotions.  If the price dropped due to a sudden change in fundamentals or due to a yellow or red flag that you ignored before you bought it, investigate the seriousness before pouncing on the “Sell” button.  Could it not turn around and become a winner?  That is, just because it’s down, does that mean it will continue to go down?  This is where you need to do your homework.  A stock has a precisely 50-50 chance of either going up or down after you buy it, in either case often for no good reason.  If you sell after a drop of 5- or 10-percent when no bad news has been announced and the track record of the company is still strong, you will sell at a loss and likely miss out on a chance for the price to recover and eventually earn you a profit if you’re patient enough to hold on.

Sell a stock that hasn’t done anything for a while

Why waste your time in a stock that isn’t going anywhere?  Sure, it’s not losing any money, but you can put it to better use in a more solid investment.

TRUTH:  First of all, how do you know which would be a more solid investment?  Most importantly, don’t assume that no news is bad news.  If a company has a strong balance sheet and no news or no bad news, that stock can pop up sharply at the first sign of good news and/or based upon a good quarterly report.  How do I know this?  From extensive personal regret.  Selling a stock like this is a mistake that I’m still prone to make as I can get too impatient during boring periods.  This year alone (2015), I’ve twice sold a stock that has jumped sharply in value within days after selling the stock!  You’d think I would have learned the first time.  Alas, I’m still a work in progress, but let this be a lesson to you:  please hold on if nothing’s wrong with a company even though it may seem to be taking forever to make a move upward!

Try to time the market – buy low, sell high

Instead of holding onto a stock and having to put up with all the stressful peaks and drops, sell the stock after a jump in price and buy in again after a drop in price.  In other words, buy low, sell high.  Play the market, don’t just sit there and do nothing.

TRUTH:  Nobody ever buys at the exact lowest low and sells at the exact highest high.  It’s impossible to time the market perfectly.  Even the Buffetts, Grahams, and Lynchs have not been able to do this.  In fact, most of them don’t even care about stock price but about company value and long-term prospects regardless of market conditions.  And in the process of trying to play the market, any profits are reduced by transaction fees.  Even if fees are low, trying to time every blip has been proven to give much lower returns on a winning stock than if you just bought and held onto it for a long period.

One last thing:  be sure to click the Follow button near the top of this page.  Also, if you’re a brand-new stock investor – or still thinking about it – then I highly recommend starting with my 5-part Stock Starter Series.  To new beginnings!

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