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12 Dangerous Assumptions To Make Over Stock Prices


Whether you are a regular investor or totally new to the buying and selling of stocks, here are some pointers worth taking note of.

Stock investing is a financial instrument that is attractive for many Singaporeans. Some people invest because they have savings which they would like to grow, others start investing in stocks upon hearing the success stories of their friends. Stock investing is popular in Singapore not only because it doesn’t cost anything to set up a brokerage account, but also because it is relatively inexpensive to start buying stocks compared to other type of financial assets such as a property.

When a person starts investing in stocks, it is natural to be making many common mistakes (certainly true in this author case). Recognising these mistakes when they are made and  learning from them is essential for any investor who is looking to improve themselves. The book “One Up on Wall Street” by Peter Lynch includes a chapter about the 12 silliest things people say about stock price. We hope to add in our own 2-cents worth inputs into these pointers.

1. If it’s gone down this much, it can’t go further down

During the sub-prime crisis, many people thought that Citigroup was too cheap to be true when it fell from US$50 to US$20+. Imagine that you bought into Citigroup at that moment, only to see it hitting the US$1 mark.

As the saying goes, “never catch a falling knife” because you can get hurt really bad. People who believe that stock prices can’t fall anymore paid an expensive price during the financial crisis. Literally.

2.  You can always tell when a stock hit bottom

Peter Lynch says ~ Bottom fishing is a popular investor pastime, but it’s usually the fisherman who gets hooked.

Nobody knows when a stock will bottom out — so don’t try to guess it. Instead of trying to catch a falling knife, it’s much safer to let the knife hit the ground … and let it wiggle around a bit longer just to be sure … before picking it up.

3. If it has gone up this high already, how can it possibly go higher?

The author is definitely guilty of this having sold an investment before seeing it rise all the way up to become a ten-bagger. The matter of fact is that if you want to make 10 times your money, you can’t sell before the stock goes up 10 times. But many investors do sell the big winners early because of this faulty judgment.

The only way through this is to be patient and ride on the stocks with strong earnings growth and great fundamentals which continue to beat the markets quarter on quarter. Ultimately, the price will catch up with the fundamentals and soon, you will be on your way securing a ten-bagger. It isn’t easy to keep your emotions in check whenever your stock reaches a new high but try to remember Warren Buffett’s stake in Coca-cola – it’s now worth US$16billion up from a few million dollars many decades ago.

4. Its only $3 a share; what can I lose?

How many times have you heard people say this? People assume that buying a $1 share is less risky than buying a $10 stock. They can’t be anymore wrong. The fact of the matter is that whether the stock costs $1 or $10, you will lose everything if it falls to zero.

A low price (e.g. $1) is no guarantee of a bargain as buying a lousy cheap business is not going to change anything. The reason for buying any stock should be based on the fundamentals of the company, not the price at which it is trading at.

5. Eventually, they will come back/rebound

One has to be objective in this thinking. While there are companies which will rebound as the problems they face are just temporary, there are also examples where companies go down and out during the recession.

During the sub-prime crisis, two banking behemoths, Bear Stearns and Lehman Brothers, went down and under shocking the world who thought they were too big to fail.

In today’s fast paced world of technological changes, there is an even higher chance of companies fading away much faster. A good example would be Nokia. They once owned the largest market share of mobile phones globally until they were overtaken by more innovative competitors such as Apple and Samsung. They are no longer relevant in the smartphone industry, as least in our opinion.

Investors have to understand the businesses they are vested in, so as to judge whether the fundamentals are intact during downturns in order for a rebound.

6. It’s always darkest before the dawn

This point collaborates well with points 1 and 2 mentioned above. People always tend to have the belief that things that have gotten a little bad can’t get worse. When the stocks continue to perform poorly, they eventually give up hope and sell out at the last moment just when the stocks are making a comeback.

As Peter Lynch says, “Sometimes it’s darkest before the dawn, but then again, other times it’s always darkest before it’s pitch-black.” If you’re saying this — and you really believe it — please be certain on the actual reasons why you are selling and ensure that you’re not simply rationalising a bad decision.

Stay Tune For More

It is very common when investing in stocks to be confident in the decisions we made and to somehow think we know better than the market. Otherwise why would we even invest in the 1st place? Nobody invest thinking that they will lose yet many people still end up losing because they fall victim to letting their emotions take control of their investment decisions, as opposed to taking a more rational approach. We hope you find the above pointers helpful and do follow us on Facebook to stay updated for the 2nd part of this article.

 

Royalty-free photo from Getty Images. Used with appreciation.

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