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12 Dangerous Assumptions To Make Over Stock Prices (Part 2)

 

We cover the remaining 6 pointers on dangerous assumptions to be making when investing in stocks.

 In part one of our article, we looked at 12 silliest things people say about stock price covered by Peter Lynch in his book “One Up on Wall Street”. Today we continue on the 2nd half of these 12 pointers and give you our views. We hope this helps you in your stock investing journey.

We will start off today with number 7.

7. When it rebounds, I’ll sell

We heard this phrase hundreds of times. Yet, we seldom notice people following their own advice. When a poor performing stock rebounds, they suddenly decide that there was nothing wrong with it to begin with and keep it. If it never rebounds, they also continue to keep it.

The reason people do this is because they do not like to admit they’re wrong. So somehow, by holding on to a losing stock instead of selling it, there is still a chance that they’ll be right on this loser. Usually, they’re not. Relying on luck way too often in the market is a sure way to lose money in the long run. If you are not confident on the company, you ought to be selling the stock. If you are confident on the company, you ought to be able to explain why.

8. The “I knew it, If only I could have bought the stock, I could made so much money” statement

Over the years, there have been so many ups and downs in the market. People tend to look back and say something like: “I knew it… Colgate, Mcdonalds, etc. would rise…. If only I have bought them at depressed prices during the recessions”.

As harsh as it may sound, there is no use crying over spilled milk. There were many opportunities to buy into the well-capitalised Singapore banks during the financial crisis, which many did not take up, only to see them rise up many folds to present day prices.

We believe the main point is to learn from the mistakes and to keep improving on your mindset. Opportunities are always present but you have to be well prepared when the time comes.

9. What, me worry? Conservative Stocks do not fluctuate much…

Companies are dynamic and prospects change. What may look like a conservative business today may lose out to competition in the long run if they do not keep up with the times. Therefore, there simply isn’t a stock that you can own and afford to ignore.

And as we’ve learned during the recessions, no stock is safe because even blue chips can get clobbered. In contrast, paying some attention can allow you to buy into undervalued stocks with the likes of Warren Buffett. There is no reason for a stock investor to not be in the know of what is happening to the companies he own, even if he intends to hold them for long term.

10. It’s taking too long for anything to ever happen

“PostDivesture Flourish”, a term coined by Peter Lynch, means that after considerably waiting for a stock to do something, you give up, and when you finally sell the stock, the price of the stock starts to flourish and move northwards.

Most investors want action but the stock markets test patience and rewards conviction. Breaking down a 12% annual return is equivalent to 1% a month. That’s a great return, but there’s no action. You don’t need action. Be patient.

Lynch says it takes remarkable patience to hold on to an idea or stock that excites you, but which the market largely ignores. You begin to think everyone else is right, and that you are wrong. But remember, where the fundamentals are promising, patience is more often than not ~ rewarded.

11. I missed that one, I will catch the next one

This is such a common mistake committed by a large number of investors. Most often than not, companies who have delivered exceptional returns will continue to do so based on various factors like their earnings growth, brand image, pricing power etc.

A few local companies in context will be Sino Grandness and Ezion holdings. Thus, it may seem stupid to be buying it after you missed the boat but sometimes getting back on the same boat can still reward you in the future.

12. The stock’s gone up, so I must be right or Vice Versa.

Peter Lynch terms this as the single greatest fallacy of investing: Believing that when the stock price is up, then you’ve made a good investment. Investors confuse prices with prospects.

If you purchase a stock at $10 and it moves up to $11, investors take comfort from this fact, as if it proves the wisdom of their purchase. Nothing could be further from truth. Investors commit mistakes based on this fallacy – Either selling a good company at a loss, believing that they committed a mistake or holding on to bad apples if the prices are up post the purchase.

Conclusion

We hope that after reading this article, you will be able to understand and learn how to avoid these 12 common mistakes, and in the process become a much better investor. Always remember: In the long run, it is much easier to correct a bad decision quickly than it is to continue searching for emotional justification as your portfolio continues to shrink.

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

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