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The One Crucial Mistake Almost Every Investor Will Make

 

Back then when I first started investing in equities, I remember I would be fixated on the stock price charts to check whether my stocks had gone up or down in price whenever I had an extra two minutes to spare. Little did I know how damaging this mindset was.  It went on to cause many unnecessary mistakes and took me through a see-saw of emotions with the slightest change in price.

I believe many average-Joe investors fall prey to this addiction as well. Why are new investors, and many seasoned hands as well, so neurotic about marginal price movements even when they have based investment decisions on set of fundamental research or even have stop-losses to execute a technical trade?

With stock prices so easily accessible, people tend to deviate from their original plan when short-term price shifts go against them. Their eagerness for instant success becomes their downfall. Every budding investor has probably heard that they have to take emotions out of the equation when it comes to investing, but they do not realize that obsessively tracking price movements every 20 minutes trigger emotional impulses will in turn cause them to go against the very strategy they set out in the first place.

We showcase a list of silly things people say about stock prices highlighted under Peter Lynch’s book One Up on Wall Street:

#1 If it’s gone this high already, how can it possibly go higher?

To be honest, I often face this dilemma myself. Even when I identify good businesses to invest in for the long term, my head will start to turn when I see decent profits come in. And many people will succumb to some form of emotion –  the fear that the profits will disappear; the gratification of cashing in and instantly realizing a gain; the thought that I could spend this profit on some merchandize.

Superior businesses constantly set new highs due to the growing intrinsic value of the underlying business. This was the key to Warren Buffet’s wealth as he held Coca-Cola and Gillette for decades.

In the Singaporean context, take for example Old Chang Kee – I was at a cross-roads a year ago when it was selling for $0.55 after a sudden spike in price. Right now, it is selling for close to $0.98, up 86% proving that I was so right that it was a good business, and so stupid to give in to short-term gains.

#2 You can always tell when a stock’s hit bottom

Trust me, no one can. A grave mistake I once made totally changed my perception about those so-called “Turnaround companies”. Another simple illustration is Tiger Airways Holdings.

I bought into the firm thinking that the management team has been changed and stock price is at an all-time low.

In contrary to what I believed, it reported mounting losses consistently every quarter while promising to restructure and get things back into shape. Meanwhile, the stock price continued its nose-dive to a new low each time.

Luckily for me, I managed to cut my losses after sensing that the turnaround story was too risky for me and quite unconvincing as its overseas subsidiaries continued to bleed money. But not after deviating from my original plan and holding on for longer than I had planned to with my initial strategy.

I also picked up a valuable lesson that one should not be in any hurry to plunge right in but rather, take our time to make a thorough business assessment quarter-to-quarter.

#3 If it’s only $0.20 a share; what else can I lose?

The truth is you can lose big time. Is it safer to buy a 20-cent stock than a $5 stock? Certainly not. Only your screening process can answer that. Remember, if either the 20-cent stock or the $5 stock goes to zero, you lose 100%. An inferior cheap stock is always worse than a quality expensive stock.

Back to using my mistakes for your benefit to trade wiser in future, I once bought into a penny stock – SunMoon a long time ago when the smallest denomination of a stock price is $0.005. Any increase will be towards $0.01 – a 100% gain! But to my horror, I didn’t notice that the stock exchange changed the rules to now moving in bands of $0.001! No doubt, it was another mistake I learnt in my investment journey.

Conclusion

That said, there are still many myths when it comes to obsessing over stock prices. There are often dangerous assumptions which can result in wide varying performances in your portfolio.

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