7 investment lessons from Mom. Part 2.
4) If Everyone Jumped Off The Cliff – Would You Do It Too?
At one point or another, we have all tried with our Mom’s what every other kid has tried to since the beginning of time – the use of “peer pressure.” I figured if she wouldn’t let me do what I wanted, then surely she would bend to the will of the imaginary masses. She never did.
“Peer pressure” is one of the biggest mistakes investors repeatedly make when investing. Chasing the latest “hot stocks” or “investment fads” that are already overvalued and are running up on speculative fervor almost always end in disappointment.
In the financial markets, investors get sucked into buying stocks that have already moved significantly off their lows because they are afraid of “missing out.” This is speculating, gambling, guessing, hoping, praying – anything but investing. Generally, by the time the media begins featuring a particular investment, individuals have already missed the major part of the move. By that point, the probabilities of a decline began to outweigh the possibility of further rewards.
It is a well-known fact that the market works in what is called a “herd mentality.” Historically, investors all tend to run in one direction at one time until that direction falters, the “herd” then turns and runs in the opposite direction. This continues to the detriment of investor’s returns over long periods and this is also generally why investors wind up buying high and selling low. In order to be a long-term successful investor, you have to understand the “herd mentality” and use it to your benefit – which means getting out from in front of the herd before you are trampled.
So, before you chase a stock that has already moved 100% or more – try and figure out where the herd may move to next and “place your bets there.” This takes discipline, patience and a lot of homework – but you will be well rewarded for you efforts in the end.
5) Don’t Talk To Strangers
This is just good solid advice all the way around. Turn on the television, anytime of the day or night, and it is the“Stranger’s Parade of Malicious Intent”. I don’t know if it is just me, or the fact the media only broadcast news that reveals the very depths of human sickness and depravity, but sometimes I have to wonder if we are not due for a planetary cleansing through divine intervention.
Back to investing – getting your stock tips from strangers is a sure way to lose money in the stock market. Your investing homework should NOT consist of a daily regimen of financial media, followed by a dose of taxi driver tips, capped off with a financial advisor’s sales pitch.
In order to be successful in the long-run, you must understand the principals of investing and the catalysts which will make that investment profitable in the future. Remember, when you invest into a company you are buying a piece of that company and its business plan. You are placing your hard earned dollars into the belief the individuals managing the company have your best interests at heart. The hope is they will operate in such a manner as to make your investment more valuable so that it may be sold to someone else for a profit.
This is also the very embodiment of the “Greater Fool Theory,” which states that there will always be someone willing to buy an investment at an ever higher price. However, in the end, there is always someone left “holding the bag”, the trick is making sure that it isn’t you.
Also, you need to be aware that when getting advice from the investment bank experts who tell you about a company that you should buy – they already own it – and most likely they will be the ones selling their shares to you.
6) You Either Need To “Do It” (polite version) Or Get Off The Pot!
When I was growing up I hated to do my homework, which is ironic, since I now do more homework now than I ever dreamed of in my younger days. Since I did not like doing homework – school projects were almost never started until the night before they were due. I was the king of procrastination.
My Mom was always there to help, giving me a hand and an ear full of motherly advice, usually consisting of a lot of“because I told you so…”
I find it interesting that many investors tend to watch stocks for a very long period of time, never acting on their analysis, buy rather idly watching as their instinct proves correct and the stock rises in price.
The investor then feels that he missed his entry point and decides to wait, hoping the stock will go back down one more time so that he can get in. The stock continues to rise, the investor continues to watch becoming more and more frustrated until he finally capitulates on his emotion and buys the investment near the top.
Procrastination, on the way up and on the way down, are harbingers of emotional duress derived from the loss of opportunity or the destruction of capital.
However, if you do your homework and can build a case for the purchase, don’t procrastinate. If you miss your opportunity for the right entry into the position – don’t chase it. Leave it alone and come back another day when the Price Is Right.
7) Don’t Play With It – You’ll Go Blind
Well…do I really need to go into this one? All I know for sure is that I am not blind today. What I will never know for sure is whether she believed it; or if was just meant to scare the hell out of me.
When you invest into the financial markets it is very easy to lose sight of what your intentions were in the first place. Getting caught up in the hype, getting sucked in by the emotions of fear and greed, and generally being confused by the multitude of options available, causes you to lose your focus on the very basic principle that you started with – growing your small pile of money into a much larger one.
There is obviously a lot more to managing your own portfolio than just the principles that we learned from our Mothers. However, this is a start in the right direction, and if you don’t believe me – just ask your Mother.