Once upon a time, there was a young hare, a hotshot rabbit investor who would always brag to anyone that would listen and that he was the smartest, fastest, best performing investor in the world. He would constantly tease the old tortoise about his slow, solid investment style.
Then, one day, the annoyed tortoise answered back: "There is no denying that you are very aggressive in your investment strategy. You take very high risks and get high returns. But even you can be beaten."
The young hare squealed with laughter. "Beaten? By whom? Surely not by you. I bet there's nobody in the world that can win against me, because I'm so good. If you think that you can beat me, why don't you try?"
Provoked by such bragging, the tortoise accepted the challenge. Each of them put an equal amount of money into a new account and the race was on. The hare yawned sleepily as the meek tortoise trudged slowly off.
As might be expected, the tortoise invested in high quality blue chips, companies with household names.
The hare, as anticipated, invested his money in dotcom stocks and options.
You know the story. The aggressive hare jumped out to a big early lead. In a rising market, the highest risk stocks perform the best. This is called momentum investing. Money flows into the investments that are performing the best.
The hare, having jumped out to such a large early lead, stopped paying attention to the market environment. Basically, he fell asleep. He thought to himself, "I'll have 40 winks and still remain way ahead of that stupid old turtle."
The hare awoke from his sleep and gazed around looking for the tortoise, who was nowhere in sight. Unfortunately, while he was sleeping, dreaming about what he would do with his winnings, the market turned against him.
His very high-risk portfolio had taken a terrible beating and was now practically worthless.
The tortoise, a Warren Buffett style investor, had passed the sleeping rabbit long ago. He had been plodding forward, steadily, since the beginning of the contest. The Tortoise never for a moment stopped, but went on with a slow but steady pace straight to the end of the course.
The hare realized that the tortoise was way ahead of him, and away he dashed. He leaped and bounded while gasping for breath, but it was too late. The tortoise had beaten him.
There are two very important lessons to be learned here.
First – slow and steady wins the race.
Second – never confuse your own intelligence with a bull market.
Monday, October 13, 2008
Stock Market Investing - Top 10 List
The 10 dumbest things investors say to advisors.
1} When my investment gets back up to what I paid, get me out.
This is surely a big mistake. That stock has absolutely no idea that you're waiting for it to go up so that you can sell.
2}The stock is selling at $3.00 a share. How much can I lose?
$3 multiplied by the number of shares.
Oh yeah, don’t forget to add in commission.
3} I want to buy shares of XYZ Company. Three years ago, they were selling at $60; now the stock selling at $5.
You can actually make a lot of money investing in good companies when their stocks are out of favor (go to dictionary – look up: “Warren Buffett”). You cannot make money buying junk just because it’s cheap. (Same dictionary – lookup “cheap junk”). If this creates confusion – please see item 2.
4} The stock is up 10 % this past month.
It’s too high, I can’t buy it now. Have you ever heard of a long-term uptrend? Just because you missed the bottom doesn’t mean you missed the boat. I’ve heard that the shortest time measurable by man is the time between when it’s too soon to buy a stock and when it’s too late.
5} I paid $60 for that stock 3 years ago. Today it’s selling at $4.
I can’t afford to sell. I don’t want to lose so much. I’m just guessing here, but did you say the same thing at $30? $20?
6} I bought the stock at $10 and now it’s $35. I have too much profit.
I can’t sell here. I don’t want to pay so much in taxes. My wish for everybody is that next year you have more than twice the profits and that you have to pay twice as much in taxes.
7} I never sell an investment at a loss. I’m a long-term investor. Eventually, they always come back.
Ever heard of ENRON? Pan American Airlines? Polaroid? Penn Central Railroad? If I were to be your advisor for the next 20 years, I GUARANTEE you that you will have losses. Losses are a very important part of a successful investment program. Since the perfect human hasn’t been created yet, the perfect advisor hasn’t been created yet. Expect to have some losses and plan accordingly.
8} Sell my utilities; buy DOTCOMS.
Stock brokers heard this, a lot, just a few short years ago. Every up cycle investment advisors are instructed to sell safe, but dull investments and buy something with sex appeal that’s moving. The worst possible thing has happened – one of the clients' friends or acquaintances is making more money than they are. It’s the CINDERELLA story. They’ll look great for a short time. Then, the clock strikes “OVER” and their limo turns back into a pumpkin.
9} I know as much about the stock market as any broker.
What would you think of me if I came to your place of business and told you that I know as much about your business as you do? Can you outperform a professional in the short run? Absolutely. You would never say this to your doctor, lawyer or accountant. You wouldn’t even say that to your butcher or your barber. Stock market investing is the only profession where the amateurs think they know as much as the professionals because they might have picked a winner at one time.
10} That total stranger made the investment sound like such a great idea.
Of course he did. That’s his job. Do you remember your mother telling you “Don’t talk to strangers.”? When was the last time you ran with scissors? If you develop the practice of giving your money to strangers, sooner or later, you will come to harm. Or, as Al Capone used to say “Anybody found sleeping in the trunk of a car, deserves to be shot.”
1} When my investment gets back up to what I paid, get me out.
This is surely a big mistake. That stock has absolutely no idea that you're waiting for it to go up so that you can sell.
2}The stock is selling at $3.00 a share. How much can I lose?
$3 multiplied by the number of shares.
Oh yeah, don’t forget to add in commission.
3} I want to buy shares of XYZ Company. Three years ago, they were selling at $60; now the stock selling at $5.
You can actually make a lot of money investing in good companies when their stocks are out of favor (go to dictionary – look up: “Warren Buffett”). You cannot make money buying junk just because it’s cheap. (Same dictionary – lookup “cheap junk”). If this creates confusion – please see item 2.
4} The stock is up 10 % this past month.
It’s too high, I can’t buy it now. Have you ever heard of a long-term uptrend? Just because you missed the bottom doesn’t mean you missed the boat. I’ve heard that the shortest time measurable by man is the time between when it’s too soon to buy a stock and when it’s too late.
5} I paid $60 for that stock 3 years ago. Today it’s selling at $4.
I can’t afford to sell. I don’t want to lose so much. I’m just guessing here, but did you say the same thing at $30? $20?
6} I bought the stock at $10 and now it’s $35. I have too much profit.
I can’t sell here. I don’t want to pay so much in taxes. My wish for everybody is that next year you have more than twice the profits and that you have to pay twice as much in taxes.
7} I never sell an investment at a loss. I’m a long-term investor. Eventually, they always come back.
Ever heard of ENRON? Pan American Airlines? Polaroid? Penn Central Railroad? If I were to be your advisor for the next 20 years, I GUARANTEE you that you will have losses. Losses are a very important part of a successful investment program. Since the perfect human hasn’t been created yet, the perfect advisor hasn’t been created yet. Expect to have some losses and plan accordingly.
8} Sell my utilities; buy DOTCOMS.
Stock brokers heard this, a lot, just a few short years ago. Every up cycle investment advisors are instructed to sell safe, but dull investments and buy something with sex appeal that’s moving. The worst possible thing has happened – one of the clients' friends or acquaintances is making more money than they are. It’s the CINDERELLA story. They’ll look great for a short time. Then, the clock strikes “OVER” and their limo turns back into a pumpkin.
9} I know as much about the stock market as any broker.
What would you think of me if I came to your place of business and told you that I know as much about your business as you do? Can you outperform a professional in the short run? Absolutely. You would never say this to your doctor, lawyer or accountant. You wouldn’t even say that to your butcher or your barber. Stock market investing is the only profession where the amateurs think they know as much as the professionals because they might have picked a winner at one time.
10} That total stranger made the investment sound like such a great idea.
Of course he did. That’s his job. Do you remember your mother telling you “Don’t talk to strangers.”? When was the last time you ran with scissors? If you develop the practice of giving your money to strangers, sooner or later, you will come to harm. Or, as Al Capone used to say “Anybody found sleeping in the trunk of a car, deserves to be shot.”
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