Today’s article is about the reason to invest in a particular stock and the important fact, that just because a stock went up, it doesn’t mean you are right. One could argue, that when something works, the reason is unimportant, but that’s just not true. For example, if you jump into a lake and don’t know how deep the water is, there are two options: you break your neck or you enjoy your bath. Got it?
There are a lot of bad reasons to buy a stock, almost to much to mention. Let’s discuss a few.
Buying/Selling a stock because it went up/down: This is a common mistake. As written in Do not listen to Mr. Market, the stock market suffers from huge fluctuations regularly. If you want to buy a stock, don’t buy it when it’s totally overpriced. Instead search for great companies with a low price and it will be a successful investment. Also don’t panic and sell because the stock went down. Instead check the fundamentals again and make sure you didn’t overlook something.
Buying/Selling for the wrong reason: Today everything is linked to everything, so we call it globalization.This fact often makes it difficult to understand certain developments. It’s not enough to check out the product of a company and know the local business circumstances any more. You have to know exactly what the company does, understand the business model and figure out which variables are critical for success. The lack of understanding world economics like, for example, the euro/dollar constellation, might bring you into serious trouble and may cause unexpected surprises. Read Investment Research: What does the company do? for more information.
Bad investment advise: Especially dangerous for inexperienced investors who keep asking “What’s your favorite stock at the moment? What should I buy?” Again, check out our article Do not trust analysts and fund managers, which tells you why you should make your own investment decisions. Even if you have a good friend who invests successfully, you should probably not invest in the same stocks, because he buys them for specific reasons, which he monitors regularly. You will probably misjudge the case and make mistakes, because you don’t understand the company like he does. You know probably more about other industries.
Remember, we do serious long-term investing here, so if you have a trader attitude, this conclusions may not apply for you.
On the other hand, you’re not necessarily wrong, when your stocks go down. If you invest reasonably, but the stock market is not ready yet, you can also suffer months/years of falling prices, but in the end the attitude of value investing will be superior.