Opinion: Ridiculous investment advice you should never follow
MIAMI (MarketWatch) — On CNN, “Anderson Cooper 360” features a segment called “Ridiculist” that showcases certain people’s most ridiculous behavior. That got me thinking about some of the most ridiculous investment advice I’ve ever heard.
Here is my list, though I’m sure you can add ridiculous advice you’ve received from “experts” who should know better.
1. There’s always a bull market somewhere
There might be a bull market somewhere, but it won’t always be in stocks. And if there is a bull market somewhere, there must be a bear market somewhere, too. The problem with this comment is that it makes people believe the stock market always goes up. As many investors already know, that is most definitely not the case.
In truth, bear markets are a natural part of the market cycle, so they should not be feared or ignored. It would be nice if the market always went up, but that is unrealistic and dangerous.
Therefore, telling investors there is always a bull market somewhere makes them feel like they are missing out on something big. It also makes people believe you should only be bullish. If you believe that the market always goes up, as this statement implies, the market will teach you a lesson you’ll never forget.
2. The ‘little guy’ is causing the market to fall
When the S&P 500 or some other market benchmark is falling, analysts always want to blame someone. The retail investor is an easy scapegoat. I heard a commentator make this ridiculous comment during a recent market selloff. Come on! The “little guy” (i.e. retail investors) do not have the power to move the markets (unless there is mass panic). In fact, the retail investor is usually the last to get out of the market, and often at the bottom.
In the early days of a market correction or pullback, it’s almost always institutional investors and other professionals that are rushing the exits. So please, stop blaming the little guy. If anything, blame them for selling too late because they also believed this next bit of ridiculous advice.
3. Your stock will come back to even
The conventional wisdom is this: If your stock goes down, you should buy more because you are getting a bargain. If your stock goes up, you should buy more because you’ll be missing out on a great opportunity.
In reality, there are times when your stocks, even some of the best, do not come back to even or at all (see Bear Stearns and Lehman Brothers). If you are going to invest in individual stocks, ignore this ridiculous advice. Hoping that your stock will come back to even will cost you money. In fact, hope has no place in the vocabulary of any investor. A better strategy is to sell stocks once they decline more than 7% or 8%.
4. Buy on the dip
Buying on the dip during a bull market or when the market is in an uptrend can work, but if you buy on the dip during a downtrend or bear market, you could get slaughtered.
Even worse, some people buy on the dip while they are holding losing positions. Here’s a rule: Don’t ever buy additional shares of a losing stock, especially if it is still going down.
That losing stock is down for a reason, and adding more shares of a loser is ridiculous.
Unfortunately, buy on the dip is repeated often. Recently, some commentators suggested that retail investors buy emerging markets. Ridiculous! It’s highly likely that emerging markets are not going to bounce back any time soon.
Bottom line: Buying stocks on the way down (i.e. the dip) is bad advice, especially in a dangerous market. Instead, buy stocks after they’ve stopped falling and are on the way up.
5. You can get rich quickly
There is nothing more ridiculous than books that promise to make you rich in the stock market. Yes, you can win, build wealth, and make profits, but to believe that after reading a book you will get rich is ridiculous, and is only designed to sell books.
It’s doubtful that even one reader will “get rich” in the stock market after reading a book about the market, especially if they are starting with only a few thousand dollars. Indeed, when get-rich type books appear on the bestseller lists, that’s a signal that the market has reached a top.
6. Buy low, sell high
Similar to buy on the dip, the “buy low and sell high” mantra has been drilled into investors since the early days of the stock market.
Unfortunately, this cliché has caused many investors to lose big in the market. For starters, the terms “low” and “high” are difficult to define. No one knows what is low or high until after stocks have reached these points.
Here’s an idea: Buy when the market is in an uptrend, and sell or reduce your position when the market becomes dangerous. Bernard Baruch, the successful financier and economist, said of this strategy: “Don’t try to buy at the bottom or sell at the top. It can’t be done, except by liars.”
Michael Sincere’s newest books, “Understanding Options” (2nd Edition) and “Understanding Stocks” (2nd Edition) have just been released by McGraw-Hill. Sincere’s website (www.michaelsincere.com) uses indicators and analysis to determine if stocks are in a bull or bear market.
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