As earnings season is underway, some people may be interested in investing in a stock for the first time in their lives. Putting money in an individual stock is a non-conventional way of investing as stocks are one of the riskiest asset classes (learn about different asset classes).
For the courageous individuals who are interested in investing in stocks, the 3 tips below are for you.
1 – Don’t Catch Falling Daggers!
The old adage of ‘buy low and sell high’ leaves most investors to believe that they should invest in a stock after it has hit rock bottom. The basic premise of ‘buying low’ leads many investors investing in stocks that are on their downward decline.
The act of buying stocks that are on their decline in the hopes that they have reached ‘bottom’ is known as ‘catching the falling dagger’. Speaking from personal experience, you will get cut if you try to catch the falling dagger.
The common misconception of ‘buying low’ causes many first time investors to invest in losing stocks. Investing in an undervalued stock can be a good long-term strategy, but will require emotionally strong investors to be patient enough to wait for the turnaround of the company (this can take months or even years).
Many emotional people will become impatient and sell off a stock that has lost value and forever write-off the market as gambling.
Catching a falling dagger will only get you cut! If you can’t handle a cut here or there, then don’t buy a stock on its way down.
2 – Winners Typically Keep Winning
In the same sense that we should not invest in ‘losers’ because they are on the way down, we should invest in companies that have a proven history of strong growth.
‘Winners’ are companies which have stock prices that are constantly breaking their record high. Think FAANG (Facebook, Amazon, Apple, Netflix, Google [Alphabet]) when you are thinking about companies that are ‘winners’. The problem is that the market has found most of the ‘winners’ in the stock market and typically drive up the price of these companies to very expensive levels, making them riskier.
Buying stocks at their all-time high is an uncommon investment strategy, but buying these types of stocks may provide the best investment strategy. The problem is that these stocks are constantly being thought of as too expensive.
Waiting for a %3-%7 drop in the stock price of a ‘winner’ would be a good entry point to buy the stock. However, waiting for the drop is not necessarily important because, over the long run, a winner will provide great returns.
Whether you bought Amazon at $25 (in 2003), $50 (in 2009), or even $100 per share (in 2011), you would have made a huge return today with a stock price of over $900, April 27th, 2017. Buying a winner at any point is typically a good idea.
Just keep an eye on your ‘winners’ over time and make sure they don’t turn into ‘losers’ or you might lose all the gains you have received over time. See Valeant (VRX) below, which was thought of as a winner in late 2014, until they weren’t in mid-2015…
3 – Don’t Watch CNBC – Think for yourself
When I first started investing, I read every article from every news site. While there are many benefits to reading and being aware of the current market situation, I strongly urge any investor who is starting out to avoid cable new channels on T.V. that focus on ‘The Market’ as a whole.
As investors, we should be more focused on specific industries or stocks, instead of the movements the overall ‘market’ is making.
Like non-financial news, CNBC (and other finance focused networks) only share the biggest scariest stories, as these are the types of stories that drive better ratings.
Media today (and journalism as a whole) has been perverted to a point where it is not the best or most important stories that get the lead spot on nightly news, but the most emotionally riveting story that gets that honor. T.V. news is meant to incite strong emotions in its viewers, which is great for ratings, but horrible for an investor who is just beginning.
For the reasons that I do not watch CNN or FOX, is the same reason that I do not watch CNBC. I do not want my perspective of the world (and of particular stocks) to be manipulated by hyperbolic statements from media news reporters.
Too often, the market is ‘in a bubble’ or ‘overvalued’ by these major news corporations. Instead of providing helpful information for investors to think critically about, these news channels simply try to scare the sh*t out of us.
Just take a look at these articles: 1, 2, and 3. The titles of these 3 articles alone could scare any normal person from never investing in the stock market. After seeing several dozens of articles from the ‘gloom and doomers’ of CNBC, I have sworn CNBC off altogether (except for Cramer).
A few sites I do follow are:
- Seeking Alpha
- Market Watch
- Yahoo Finance
- e-Trade News
- Motley Fool
- Twitter – Twitter might be my favorite stock research tool
- Mad Money
Don’t be swayed by the media. Instead, be independent, do your own research, and think for yourself.
P.S. Thanks for reading as always. Please share, like, comment, and reach out if found this article helpful.