Other Stock Thoughts

In my lengthy description of my own stock trading experiences I neglected to mention one of the first bits of insight I was ever given into how most people end up losing money on the stock market. It was a financial planner who pointed this out to me, and I'm repeating it here for general consideration - or entertainment.

What's the oft-quoted approach to making money on the stock market? 'Buy low; sell high,' right? And yet what most people seem to do is exactly the opposite. That didn't ring true to me when he said it, because who'd be stupid enough to buy high or sell low, let alone do both? But he explained it in a way that I couldn't help but agree with.

People who try to get rich quick off the stock market often buy whenever someone they know starts talking about the money they made off stock X or Y. Joe tells his neighbour Fred that he just made $5000 off Nortel stock, so Fred rushes to his computer and does a Buy transaction on Nortel. Of course, if Joe just made money on it, then chances are - on average - that the stock he sold was at a somewhat high price. So by using someone else's success as an indication of what to buy, you're very likely to be buying high.

Similarly, faint-hearted investors will often panic-sell their shares whenever a stock suffers a setback, regardless of what the longterm outlock for the company is. They bought at $50/share, have seen it drop down to $30/share, and so they sell and take their 40% loss and curse the stock market for its unreliability. In other words, they sell low. In the scenario where the stock is down but there's no reason to think it won't rebound, the better response, if you can afford to take the risk, is to buy more. You know you're getting it at a better value than the original shares you bought, so you're more likely to be buying low and have an opportunity later to sell high. Of course, doing so for a truly troubled stock simply means you're throwing good money after bad. So some research or professional consultation is advisable in situations like that, unless you can afford to lose the money (and learn a valuable lesson in the process).

I've always considered this very helpful and insightful information that I got, and I've certainly thought about it many times in the decade and a half since.