Not all of us can relate to buying a bad stock. Some of us may be frequent buyers, while others may have zero knowledge on what stock to buy and how much to pay for it.
Today, we will share about how buying a bad stock is similar to buying a bad shirt. We believe this would be much more relatable for most people.
Don’t Buy A Stock Just Because It Is Cheap
One of the oldest yet most effective sales strategies that marketers frequently employ is to give customers the impression that they are getting a great discount. For example, you will see shops littered with signboards claiming that a $100 shirt is now being sold at $40, or a discount of 60%!
This sales strategy is simple. Sell the shirt initially at a high price, and get some people to buy it first. This locks in a high profit margin for the initial sales being made. After some time, lower the price substantially. This would help convince other customers who have not bought the shirt yet to think they are getting a wonderful deal.
When it comes to buying stocks, there are always people out there who are justifying their investment decisions based on the fact that a stock that used to cost $2.00 six months ago is now $1.00 today. They reason to themselves that since the stock used to cost $2.00, it’s a good deal today at $1.00.
This logic is about as intelligent as a person walking in to a shop and buying a shirt for $100 just because the signboard said it used to cost $200.
Buy A Stock Because It Is Good
You should always buy a shirt because it is good, and not cheap. The same rational applies to buying a stock. Buy a stock not because it is cheap, but because it is good.
Avoid buying a stock just because it is now much cheaper than it used to be as there is usually a good reason why that is the case.
Regardless of how cheap a stock appears to be, don’t add it to your portfolio just because it is bad. That’s like buying a shirt that has terrible quality and looks bad on you just because it costs $5.
If you see a good shirt at a good price, you can consider buying it. Still, we shouldn’t just go around buying everything that is cheap and good.
Consider Your Own Portfolio First
Let’s say you already have 5 white long sleeve shirts in your wardrobe. Should you add a sixth shirt just because you found something that is cheap and looks good? Probably not.
Likewise, when you buy a stock, it is important to consider your personal needs, and the existing portfolio that you already have. If your portfolio is full of REITs and banking stocks, adding another stock from the same sector may not enhance your portfolio.
Likewise, a retiree who is no longer working and relying only on passive income from his investments may not want to invest too much into growth stocks. This is like how he wouldn’t need 6 white sleeve shirts at home.
What Works For Someone Else May Not Work For You.
H&M shirts look really good on David Beckham. Cristiano Ronaldo looks good in Nike. However, what works for them, and their fantastic physique, may not be suitable for us mere mortals.
It’s the same thing with investing. Just because Warren Buffet or George Soras is investing in a certain asset class does not mean we should be. Your neighbour might be buying multiple properties and investing in commercial projects. It does not mean you should just copy him.
Get a shirt stock that fits you, and not the person beside you.
Learn And Gain Experience
Finally, it is important to be educated about what we are buying. When we go into a car showroom, we do our homework before that, since buying a car is a big purchase.
When we walk into a shop to buy a shirt, we usually know what we are looking out for. When we go on holiday, we do our research beforehand.
We need to look out for good stocks using the same attitude. We first need to learn about the stock market, gain sufficient experience monitoring, and investing in small amounts. Once we are confident in knowing what to look out for in the market, we can then become better investors.
Top Image Credit: DollarsAndSense.sg
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