Nothing is more destructive to an inexperienced, amateur, or even the experienced investor, than the line of thinking that a stock that has been gradually falling over a year, and losing value, is worth buying. These stocks are called, “fallen angels”, because at one point they were among the high value stocks, but are now worth very little, and continue to be worth less and less. This is generally thought of in the old Wall Street metaphor, “If you try to catch a falling knife, you’re bound to get hurt.”
For example, think of two stocks: Stock AAC was at its height the year before this, at fifty dollars per share, but has now fallen to ten dollars per share. Company XXZ is a much smaller company, with stocks placed at ten dollars each, but has previously risen from five dollars per share.
As much as this seems like common sense, which of the two stocks do you think the majority of investors will buy? As a matter of fact, even though this is obviously the wrong decision to make, a large number of investors will choose to buy the stock that has fallen from fifty dollars to ten dollars. This group of investors will bid on the fallen stock, because they truly believe that the low value stock, will suddenly skyrocket in value. Experts say that this line of thought in the stock market is practically a cardinal sin. The price of a stock is merely one part of the bigger stock market investing picture as a whole. An investor that starts buying stock in companies just because their stock is fallingis on a fast-track to nowhere at all. But investors should not confuse buying falling stock in companies with dwindling value, with what is called “value investing.” Value-investing is basically buying stock in companies that are high-quality, but unfortunately undervalued in the market.
Another harmful myth, is just plain old gravity. The thinking that, “What goes up must come down.” When it comes to buying stocks, the laws of physics don’t really apply. There is no such thing as a gravitational pull, working in the stock market, to make shares values even out. For instance, over a decade ago, Berkshire Hathaway’s stock values raised from six thousand USD, to ten thousand USD, in just over a year. Now, consider whether an investor had followed the “gravity” train of thought. They would have missed out quite a bit over the nearly six years, when the stock finally reached it height of seventy thousand USD.
Another example, is Wal-Mart’s stock values, from the year 1997, to 2000. The stocks hit five major points of resistance, before rocketing upwards again, each time to a newer height in value. The investors who sold their shares because they thought the value was going to even out completely, completely missed a return of five hundred percent, or even over that. Investors forget too quickly that behind the stock, exists the company itself. And Wal-Mart is a great example of a company that is consistently top in its industry. The main reasons for this, are that Wal-Mart is innovative, and creates more and more value every year, for both shareholders, and customers alike. However, it is not as if stock values never end up being corrected, quite the contrary. The general point, is that the price of stock in a company, is basically a reflection of the company itself. When an investor finds an excellent firm, being operated by skilled, competent managers, no one will be able to find a reason why that particular stock should not go up.
Possibly the most common myth of the stock market, is that having a small amount of knowledge, is better than having no knowledge. Generally speaking, having some knowledge, is better than not having any, of course. But when doing business within the stock market, the most utterly crucial, and cold hard fact, is that an investor must a close-to-perfect understanding, of exactly what they are doing with their money. No late night infomercial courses on get-rich-quick stock market techniques; those are scams based on getting consumers to hald over their money to con artists. Investors who are economically educated, and have done their homework, are the ones who successfully operate within the stock market.
But do not get frustrated and give up too soon. If an investor doesn’t have a very clear idea, or understanding on how to invest their money in the stock market, the investor should hire an advisor, and real some real literature on the subject, not the testimonials of paid actors on infomercials. For an investing, putting money into an investment that they do not completely comprehend, is bound to have extremely negative results, and will most likely, cost the investor more money than they had intended from the start.
It is important to remember another old investing saying, “What is obvious, is obviously wrong.” Even though, as previously stated, knowing a little bit about something, is not necessarily bad, generally speaking; but stepping into the fast paced world of the stock market that much more difficult for a new investor. Naturally, they will most likely end up following the majority of amateur investors with little knowledge, waiting for something to be updated, or for a sliver of knowledge to float their way. These people sometimes get lucky, but rarely ever make any actual, noteworthy profit. Basically, like anything with real value, learning how to invest successfully takes hard work, time, energy, and sometimes money, with which to pay an adviser. Learning from a quick software program, or a course sold on late night television, is basically just a loss of money; professional, experienced advisors are the best source of knowledge to a beginner, intermediate, or even experienced investor. The best investment professionals are willing to admit needing a little instruction from time to time. Investors that have been scantily informed, are just like any other professional with little information; dangerous, and harmful to themselves, and those around them.