There are enough investment newsletters, analysts’ recommendations, and stock tips circulating to exhaust and confuse any investor. I’ve read so many ways to make money in stocks lists that I decided to view the other side of the equation. How about ways to lose money in the stock market? Thus, 10 ways to guarantee you’ll lose money in the stock market was born.
1. Do zero research on the company - Refuse to look up a single quote, balance sheet, or earnings estimate. Instead, base your entire reasoning on the length of the company’s name. Take a step further, and block access to financial websites on your computer. Only allow access to message boards so you can get stock tips to complement your six syllable stock picks.
2. Execute Market Trades - Why waste time by determining your own buy and sell prices? Just let supply and demand take its course. Give your broker the authority to execute the trade whenever it’s convenient for him or her. They’ll get the commission, while we can relax.
3. Buy High and Sell Low - Time your trades so you pay the market premium for stocks. On the flip side, sell your shares when no one wants to buy. When a stock begins to rebound, sell off your stake before you make any money.
4. Invest in companies facing bankruptcy - Even though the company can hardly pay its bills, be optimistic and invest in a glorious turnaround. Allow corporate management to use your stock as collateral in the bankruptcy courts. Then expect nothing in return but a pathetic court notice, and still wear a smile on your face.
5. Treat Proxy Statements and Annual Reports as spam - Dispose of annual reports and proxy statements as you would delete spam e-mails from your inbox. If they continue to come, change your home address to end future contact.
6. Invest in one sector - Ignore diversification, and put your money in one stock market sector. It’s easier to track, and although your risk is high, you hate following multiple stock market sectors. Pretending to follow just one is a lot easier.
7. Trade Penny Stocks - They’re cheap, and you shop for stocks like you shop for clothing in a thrift store. When searching for penny stock tips, you frequent message boards, and believe whatever stocktrader333 says.
8. Buy in one lump sum - Throw dollar cost averaging out the door, and go with lump sum trading instead. You buy or sell once, and that’s it. You almost always pay more the stock, but at least you avoided $8 in commission fees.
9. Invest in only domestic stocks - The growing international markets are complete hype, and you rather stick to domestic equities. You believe global diversification is unpatriotic.
10. Trade with fear - When stocks dip, you forgo rational thinking, and immediately sell. You’re extremely risk adverse, and would be better off placing your money in a savings account.
While most of what you’ve said is great, I’ve got a couple questions.
You introduce the idea of timing your purchase and sales in a couple of the points, which sounds to me like you mean buying when the stock is undervalued and selling when it’s overvalued. That, of course, is a good thing. That brings up something of a contradiction in #8 where you say that you will “almost always pay more” for buying in a lump sum. Are you suggesting that the trade size with push prices higher? Or are you indicating that you could get in at lower prices?
I bring this up because if you pick a spot to get in where a stock is very undervalued then why not load up and purchase as much as you can? (within risk guidelines, of course) If you think the price will go further down, why buy at all when you could just wait for lower prices? Otherwise, not taking on a full position means you leave profits on the table.
Good question. Investors lose money when they try to time the market, unless you’re a stock market genius. And timing the market can lead the ill-advised purchases where you may buy high and sell low.
For those market timers, lump sum investing is highly dangerous because they assume a ton of risk once the trade is made. But if we say buy over the course of a week, we can obtain a better average price regardless of price fluxes.
From my experience, lump sum investing is not for me, but if it works and you can handle the added risk, go for it.
“But if we say buy over the course of a week, we can obtain a better average price regardless of price fluxes.”
That assumes the market isn’t trending higher, of course. If it’s range trading or moving lower, then certainly opportunities to buy at relatively low prices will present themselves.
I’m not sure I agree with your premise that buying in a lump sum is any riskier than buying over time. You could say that it is at the very beginning of the process, but if you end up with the same position size at the end of the week, do you not have the same exposure?
But getting back to market timing, that sounds like it’s exactly what your are proposing to do. My definition of market-timing is to attempt to pick optimal entry/exit points. Not market timing would mean just making the trade at the time you determine you want to own the shares based on your analysis of valuation or whatever. You get what I mean?
Assuming the underlying security is undervalued, the share price may be trending higher, but ultimately is cheaper than its intrinsic value.
I didn’t mean to contradict myself, but I believe I misunderstood your definition of “market-timing.” When I think of timing markets, a macro outlook on the stock market and the corresponding sector comes to mind. On the other hand, if you’re following a security, then you aren’t really timing your investment - you’re waiting for the optimal buy price. It could come in a week or a year, regardless of time.
On the lump sum vs. dollar cost averaging, The Sun’s Financial diary had a great post on Dollar Cost Averaging vs. Lump Sum Investing that you may be interested in.
Although your returns have the potential to be greater with lump sum investing, I feel more comfortable buying a security over time to hedge risk. Since most of my investments are long-term and I’m still in college, DCA works best for me.
Once I graduate from school, lump sum investing will most likely become part of my investing routine.
Thanks for the comments. You’ve given me some great post ideas.
“… youre waiting for the optimal buy price. It could come in a week or a year, regardless of time.”
That, right there, is how I would define timing.
If a stock is priced below value, then if you do not market time, you would just buy and hold until it is either at or above value. You can use DCA to add to a position over time for as long as it remains undervalued.
Glad to help you keep churning out the blog posts! No doubt I’ll come up with something for my own as well.
ok this is a great blog but and even a decent post but as far some of the points you make…..blahhhhhhh the dollar cost averaging will not ever outperform value investing—-which consists of timing the maket in the form that forman tries to put it… you basically pick a stock using screens, formulas and alot of research, then you run the numbers and you get a price that you are willing to buy this great company at and then you wait until “MR. Market” throws the price down to that level.
its all about valuation not price and patience not really averaging….unless you only want sub par to average returns.
@ Richbiz84
I agree that price is what you pay, and value is what you get.
But often it’s difficult to effectively time the markets, which is why dollar cost averaging is beneficial to the average investor.
Usually I wait for large sell offs, then accumulate a position. Patience is a HUGE KEY…you’re absolutely on point with that statement.
Good points all around, and thanks for stopping by.