Education, Finance

4 things to avoid when investing in stocks

Things to avoid when investing

In 2016 I churned over $1M dollars in trades on one of our retirement accounts.  (a more detailed post on that is in the works)  My return at the end of the year?  About $2K. Wah Wah.  We’re you expecting a bigger number?  So was I.

I don’t use that strategy for all our accounts, but trying to “beat the market” I wanted to see how well I could do.

Over the years I’ve tried a lot of different strategies and have been affected by market psychology just like many people, but looking back after investing for 30 years, my biggest mistakes stand out.  I’ve highlighted here, what I estimate to have cost me by biggest losses during that time.  Let’s get to it.

#1 Asking friends if a stock is a good or bad investment

I had a friend who was a heavy user of Adobe products.  A lifetime customer, who was intricately immersed in the features and had used their software for many years.  When a recommendation to buy the stock popped up, I bounced the idea off of her, and she hedged and wouldn’t commit that she thought that there was still growth available within the company.  I took that as negative commentary and passed on the stock.  The stock has steadily marched from about $40 to topping $170 recently.   Asking a friend for a green light or red light on such an investment is the same as throwing darts at a stock chart.  You can value their opinion as a customer, but don’t read any more into than that.

Fix:  Do you own research and trust your gut.

#2 Paying too much attention to news sources

I often evaluate my investment sources, based on what they cost me, and my subsequent return on investment ideas that I garner from their content.  Based on that formula,  Barron’s magazine has probably cost me in excess of $15K for the price of going too heavy on Transocean (RIG), based on a 500 word article written about the offshore drilling company in 2013.  The parent company of the Deep Water Horizon rig tragedy that flooded the Gulf coast with oil for 30 days in 2009, looked good on paper.  It wasn’t and it proceeded to sink from $50 to below $10 over a period of 3 years.  With so much noise on all the investment channels it’s hard not to be influenced by the stock pick of the day.

I was a little surprised when the story broke that even Jim Cramer doesn’t beat the market.  Most of this is about making sure that you’re balancing your true risk (see below) and researching as much about the company as possible.

Fix: Don’t go too heavy on a single investment and use multiple sources to balance your decision.

#3 Watching the market too closely every day

In the past, I’ve tried to micromanage my investments, in buying and selling, based on overall profit or loss, in a day, week, or monthly period.  Most of the time, that has resulted in what is the standard for most people that try it.  I end up selling my winners too early, and holding on to my losers (and a larger percentage of the losers) for too long.  If you make it to the end of this article, and you can truly come to a reconciliation of your true risk exposure, then at the end of the day, you should feel very comfortable holding your investments, no matter what happens in the market on a day to day basis. (and that doesn’t always simply mean “Buy and hold” forever)

One stock that I micromanaged too closely was Fitbit (FIT).   It started out like gangbusters and I felt like a genius early on, but there was so much negative sentiment about the stock, even though the company was showing a profit, that when the tide started to turn, I was over exposed.   I learned my lessons on that one, but I still hold onto some shares at a risk level that I’m ok with.  I do that, because I still believe in the company and I’m an avid user of their products.  Based on my current investment, I’m ok if the stock moves down by 10% to 15%.

Fix: Turn the news channels off. There is very little in the way of “Breaking news” that will make a difference in your returns.

#4 Selling too soon

This last one is really the flip side of the same coin, related to the one above.   I’ve lost so much money by selling too soon, that I should long be retired on a beach somewhere.  It reminded me of a note that I had sent to my niece that addresses long term investing strategies.   From Microsoft to Amazon, many people have stories that include selling too soon, and they shouldn’t because it’s easily unavoidable.

My most recent premature trigger pull was with Weight Watchers stock (WTW). I had entered a position 3 years ago, and added to the position as the stock fell.  I garnered a windfall when Oprah purchased 10% of the company, and made a nice little profit on the bounce.  While the stock came off it’s highs of around $25 and returned to the low teens for a year, I had always felt the stock was worth in the neighborhood of where I originally established a position, $50.   However,  after the ups and downs of another year, with no traction, I decided to exit my position of my remaining 600 shares at $17.   Today, the stock is at $46.

Everyone has Win/Loss stories, but the bottom line here is, that I went against my own (and my wife’s) better judgement of selling too early.  The stock is at $46 today, and I would have garnered an extra $18K if I had simply held the stock.  Dollar cost averaging works when you sell too.  So if you’re exiting a position that you think might turn around, simply don’t exit it 100%.

Fix: Buy what you know and understand the fundamentals.  Also understand the competitive landscape.

Understanding risk

When looking at a basket of recommendations from various sources, in the past, I’ve sometimes tried to “cherry pick” a guess, based on a gut feel or on buzz that was in the market.  Don’t try this.  It doesn’t work.  What I realized about what I was doing was that I was taking on way too much “risk”.   Everyone knows that investments are risky, but you really need to objectively take a look at how much exposure you have, especially across multiple investment accounts.  For example if you own offshore drillers in one account, and Exxon in another account,  you should consider that as an investment in oil.  The more accounts that you maintain, the more difficult that can be.

What gave me a better handle on understanding risk was reading the chapter on the topic from the book Trading for Dummies.  The book provides practical examples about risk, and reality.  When you pick a stock and it gradually slides from $40 dollars a share to $20 dollars a share, then you’ve lost 50% of your original investment.  HOWEVER, the thing that most people overlook is that that same stock must rise by 100% now, just for you to break even.   The chances of that happening, especially over a short period of time are very small.   Now, I take a much smaller initial position in any stock, and decide over time if I want to subsequently add, subtract or exit from that position.

This also let’s you get a feel for management’s reporting style, during quarterly earnings reports.  Some of these CEO’s are maddeningly frustrating with what they say, and how they report their own numbers.  Getting a feel for those skills might provide you with an indication of whether you’re a good fit for that company, as an investor.

Bottom Line

The bottom line is that you should really focus on learning as much as you can about yourself, as an investor.   That includes both strengths and weaknesses.  Do all the leg work that you can, and take into account what you know to be historically accurate.  History repeats itself, and that is more true in the stock market than almost any other place.