Markets have a way of luring investors into doing things they shouldn’t. Be it innovative new products or promises of high returns, there’s always something to tempt an investor’s resolve. And it ends up being costly. As with many things in life, avoiding certain things often lead to the greatest results.
I was reminded of this while browsing Another Investor’s Anthology. Part of its collection is a chapter from an outdated book by Claude Rosenberg, Jr. It’s a list of investing rules that are more likely to cost you money than make it in the long run. So investing don’ts. His list pertains to stocks specifically but is true for most investments.
Here’s the thing. None of the rules are new. They’ve been repeated so many times that they should sound obvious. Which is the point.
Common investing mistakes are common because it’s so easy to fall back into the trap of making them. Sometimes we forget how it turned out the last time. Sometimes it’s a momentary lapse of judgment. Whatever the reason, hindsight reveals what we likely already knew — we never should have done it in the first place.
But that’s life. Mistakes will be made. The goal is to limit the damage. Timely reminders of the more obvious ones may save us from ourselves someday.
Here are some favorite don’ts from Rosenberg’s list for your enjoyment.
- Do not make hasty, emotional decisions about buying and selling stocks. When you do what your emotions tell you to — on the spur of the moment — you are doing exactly what the “masses” are doing, and this is not generally profitable… If you’re in doubt about buying, my advice is to do nothing.
- If you are convinced that a company has dynamic growth prospects, do not sell it because it looks temporarily too high. You may never be able to buy it back lower in price and you stand to miss a potential big winner… Perhaps the gravest error I’ve seen made over the years is selling great companies with bright future prospects just because they temporarily looked a few points too high.
- Do not fall in love with stocks to the point where you can no longer be objective in your appraisal of them… You do have to scrutinize stocks and think of their worst points; you have to reassess your love constantly and you have to be brutal and unemotional in your appraisal.
- Do not concern yourself as much with the market in general as with the outlook for individual stocks… As they say, it is not a stock market, but instead a market for stocks. Buy a good value as it appears and do not let the general market sentiment alter your decision.
- Forget about stock market “tips.” Use your good judgment and you won’t have to rely on unreliable information. I realize that this point shows no world-shattering brilliance on my part, but so often I’ve seen this advice ignored…
- Remember that stocks always look worst at the bottom of a bear market (when an air of gloom prevails) and always look best at the top of a bull market (when everybody is optimistic). Have strength and buy when things do look bleak and sell when they look too good to be true.
- Remember, too, that you’ll seldom — if ever — buy stocks right at the bottom or sell them right at the top. The stock market generally goes to extremes: when pessimism dominates, stocks go lower than they really should, based on their fundamentals, and when optimism runs rampant, stocks go higher than they really deserve to. Knowing this, don’t expect your stocks to go up in price immediately after you buy them or to go down after you sell them…
- Do not buy stocks as you might store merchandise on sale… Too often people buy things they really don’t need or really don’t like and they find that they really haven’t made a “good buy” at all. But they simply couldn’t resist the urge to join others in competing for something of which there was a limited supply. There is not a limited supply of actively traded common stocks, thus I advise you not to rush to buy as though the supply is going to dry up… Resist the urge — only buy “goods” which you’re sure you’ll like and which meet your objectives.
- Remember that the public is generally wrong… A wise investor should be wary of public over-enthusiasm for anything. Don’t you be “one of the herd” and be led to slaughter as have so many who have tossed sound thinking to the wind.
- Beware of following stock market “fads”… Just like sack dresses, hula-hoops, trampolines, tulip bulbs, etc., the stock market occasionally develops fads for certain industries. In almost all cases a sudden rush to buy the fad stocks pushes them to price levels which are totally unwarranted. When you buy at the height of popularity you almost always pay prices which have little relationship to value.
- Do not be concerned with where a stock has already been — be instead concerned with where it is going. The important thing is what lies ahead, not what has already transpired, and previous market prices have no bearing on the future.
- Take the time to supervise your stocks periodically… Don’t shut yourself off from the outside world; take an objective look at your holdings periodically, with the thought of weeding out the “weak sisters” and adding stocks which have more potential.
- Concentrate on quality… Too many investors shy away from the top-notch companies in search of rags-to-riches performers. This, of course, is fine for a certain portion of your investment dollars, since most people can afford an occasional “flyer.” But a person who starts out looking for flyers usually ends up, not with just one or two, but with a host of poor quality stocks — most of which turn out unsuccessful. These low-grade issues are certainly no foundation for a good portfolio; instead, the fine, well-managed companies should form the backbone.
- Getting the Goalpost to Stop Moving – M. Housel
- The Ultimate Superpower in Investing – Compound Advisors
- The Balance Between Edge and Conviction – ValIdea
- How to Hedge Against Inflation – A Wealth of Common Sense
- Let’s Talk About Your Debts to See if You Like Stock Investments – Klement on Investing
- The Availability Bias: How to Overcome a Common Cognitive Distortion – Farnam Street
- Howard Marks: The Most Important Thing (podcast) – The Wall Street Lab
- The Rise and Fall of Planet Hollywood – Esquire
- Seeing How Much We Ate Over the Years – Flowing Data