DTT Buzz
Exclusive Market Analysis, Alerts and Commentary from the DaytradeTeam trading staff
7 Deadly Sins of Investing
- Buying Penny Stocks. Penny stocks are cheap for a reason....the company sucks. Everyone will refer to the idea that Microsoft (MSFT) was once a 10-cent stock or some other nonsense. It wasn't. What they are looking at is split-adjusted prices. Microsoft has never traded under $10/share--check it out. My bet? 9 out of 10 of your hot stocks under a buck are going to $.01. By the end of 2007.
- Not Listening to Their Wives. "You shouldn't borrow money to invest."......"I hate Wal-Mart, but I love Target"...."Krispy Kreme is everywhere now, it's getting old"...."The kids are dying for an iPod, I bet Apple makes a lot of money on those". Point made.
- Borrowing Money to Invest. This is just stupid. If a 10% gain in a year on your investment is only going to earn you 2.5% after you pay back the loan, and a 5% loss is going to be a 12.5% loss after you pay back the loan........what in the world are you trying to do? Note: Lenders will NOT give you money at a lower rate than you can guarantee yourself in the market (or else they'd just go to the market).
- Buying based on the public's expectations. Remember this one thing: A stock's price is based on the investing public's assessment of its FUTURE value to shareholders. If everyone thinks that the new technowootermobile is going to be the hot item for Christmas this year, then it's already priced into the stock. And now investors run the risk that it won't be quite as hot of an item as expected, and the stock will tank. This is why you will often see rookie investors scratching their heads with bewilderment when a stock goes down on "good news" or up on "bad news".
- "Locking in Profits". It's good to take money off the table, especially if you think a stock you own is way overpriced. It's not good to "lock in profits" and sell a winning position just because it has gone up since you bought it. Think of your portfolio as a team of players and yourself as the coach. Keep the winners in the game.
- Not wanting to "Take a Loss". Like #5 above, this is a purely emotional approach to an investment decision. You don't want to "take a loss"? What does that even mean? Isn't the stock already a loss? You don't get to decide whether or not to "take it". Side note---rich, successful people love "taking a loss". Helps with the tax-man.
- Investing based on "Hot Tips". So your brother-in-law knows a guy that is 100% sure that TechnoWootMobile.com's stock is going to $100 this year because of it's new blah blah blah. Three reasons to avoid this: #1 your brother-in-law's buddy is probably trying to get buyers to unload shares on. #2 if it was true, why in the world would you know about it before it happened? #3 Even if it is true, then you are trading on insider information and could be rooming with this guy for the next 6-18 months
I'm open for more suggestions via comments below.
Happy Trading,
Andy Swan
Co-Founder, DaytradeTeam
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Andy Swan says...
True. I was speaking more to long-term investing though, not trading. Sometimes the best deals for long-term investing are the "whipping boys" that were once heros. They have the customer contact lists, the distribution mechanisms and the brand recognition built in....they just have to turn it around!
4:24 PM
Ben Evans says...
I like your post and it is good information. I beleive that alot of people use emotion in investing.
I would add one more sin.....and that would be to invest in options without a full understanding of stredegies and characteristics. I see alot of people who buy near term otm options and take losses even if the stock goes in the right direction. Keep up the good work.
Good luck
1:36 PM
says...
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2:00 AM
Syndicate Site
A really good post - although me buying Ebat\y is not the smartest thing. buying new lows is almost always a really bad idea.
If you do, you better have a strategy and peoper money management 8:59 AM