3. Fallen Angels Will Go Back up, Eventually.
Whatever the reason for this myth's appeal, nothing is more destructive to amateur investors than thinking that a stock trading near a 52-week low is a good buy. Think of this in terms of the old Wall Street adage, "Those who try to catch a falling knife only get hurt."
Suppose you are looking at two stocks:
Which stock would you buy? Believe it or not, all things being equal, a majority of investors choose the stock that has fallen from $50 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin in investing! Price is only one part of the investing equation (which is different from trading, which uses technical analysis). The goal is to buy good companies at a reasonable price. Buying companies solely because their market price has fallen will get you nowhere. Make sure you don't confuse this practice with value investing, which is buying high-quality companies that are undervalued by the market.
Below is a chart of Nortel's decline. Imagine how much money you would have lost had you bought Nortel just because it kept on hitting new lows!
|This chart was supplied by Barchart.com|
4. Stocks That Go up Must Come Down.
The laws of physics do not apply in the stock market. There's no gravitational force to pull stocks back to even. Over 10 years ago, Berkshire Hathaway's stock price went from $6,000 to $10,000 per share in a little more than a year. Had you thought that this stock was going to return to its lower initial position, you would have missed out on the subsequent rise to $70,000 per share over the following six years.
Below is a chart of Wal-Mart from 1997 to 2000. We've circled every time the stock chart hit resistance to reaching a new high. Those investors who were waiting for the stock to come back to earth would've missed out on a return of 500% or more.
Wal-Mart is one example of a company that has dominated its industry by being innovative and creating value for both shareholders and customers.
|This chart was supplied by Barchart.com|
We're not trying to tell you that stocks never undergo a correction. The point is that the stock price is a reflection of the company. If you find a great firm run by excellent managers, there is no reason the stock won't keep on going up.
5. A Little Knowledge Is Better Than None
Knowing something is generally better than nothing, but it is crucial in the stock market that individual investors have a clear understanding of what they are doing with their money. Investors who really do their homework are the ones that succeed.
Don't fret, if you don't have the time to fully understand what to do with your money, then having an advisor is not a bad thing. The cost of investing in something that you do not fully understand far outweighs the cost of using an investment advisor.
The Bottom Line
Forgive us for ending with more investing clichés, but there's another old adage worth repeating: "What's obvious is obviously wrong." This means that knowing a little bit will only have you following the crowd like a lemming. Like anything worth anything, successful investing takes hard work and effort. Think of a partially informed investor as a partially informed surgeon; the mistakes could be severely injurious to your financial health.
The world stock market is the multitude of markets and exchanges that exist worldwide, where the issuing and trading of equities or stocks of publicly...
The GBPAUD currency pair can be considered one of the top trading pairs in the Forex market. The exchange rates of the pair are heavily influenced...
With 1855 Cryptocurrencies available and a total market cap of $ 212 Billion, the cryptocurrency market may be worth exploring for investors...
Futures trading can be difficult if investment strategies are not defined and applied properly. Some point to the fact that futures market is also referred...
Technical analysis is a method used to forecast future financial price movements based on a careful study of past price movements. The method...
Having an account allows you to access your personal area on our website and to trade. Once registered, please check your email to find out...
The term Short Selling originated in the stock market. A few years back, a person loaned stocks from his broker in order to sell them, and attempted to make a profit...
A pip, short for percentage in point or price interest point, is known to be the smallest numerical price move in the exchange market. When a price changes...
Copy trading enables traders, experienced and new alike, to take part in the financial markets, by having their trades executed by experienced...