The stock market isn't only for the rich and famous anymore. Increasingly more people are pouring into the online investing world as the days go by, (or trading world, whichever you prefer). Unfortunately, the problem lies within the fact that the large majority of new investors and traders have absolutely no idea what they are doing.
I follow a lot of social media groups related to investing and trading. I don't trade myself, but I like to look at what these groups are talking about, gauge how knowledgeable the members are, and maybe check out a few conversations that may lead to the next piece of content on my website, Stocktrades. On many of these groups, the large majority of investors are absolutely unfit to give advice. But, in today's world with the convenience of social media and the fact you can hide behind a keyboard, everyone loves to throw their 2 cents in.
This can lead to a lot of problems, especially for novice investors just starting out. Over the last year I've analyzed what is said in these groups and I have a fairly solid foundation of the erroneous assumptions that are made every day, all day. So, I've finally decided to group my findings into one article. Here are my top 5 investing concepts that beginner investors take way too far, in no particular order.
“Be Fearful When Others are Greedy, and Greedy When Others are Fearful.”
Alright, I get it. Buffett was the best investor to ever live. I certainly agree with that. But some people are taking this statement way too far. This is probably the greatest investment quote of all time, which is probably why every Tom Dick and Harry knows it. But the problem is, a lot of people take the underlying concept of this quote and blow it way out of proportion.
Buffett isn't saying blindly hold on to a failing stock and purchase more as it plummets to the depths of mediocrity and ill returns. This seems to be what a lot of people are doing. A company they hold, which by the way a lot of times I have seen they shouldn't even have been holding in the first place, posts horrendous earnings and mounting debt. The price naturally plummets due to the sell-offs from knowledgeable investors.
Now an investing beginner who is heavily influenced by online articles and social media opinions, probably hasn't read a balance sheet or a quarterly report in their life. They see the price plummeting, and images of them standing in Warren Buffett’s shoe's flash in front of their eyes. They purchase more, and more, and more, and more, until ultimately the stock settles in on what its true value should be. From there, the investor waits a year, realizes their money is never coming back, sells the stock, and goes to buy a flat screen TV.
Buffett’s intentions of this quote were to entice people to purchase stocks in companies where panic sells were not justified, and the fundamentals were good. Not the other way around.
Investing in the News
I see this one a lot as well. Investing in the news can be very beneficial, and can make traders a lot of money if done at an absolutely precise moment. Lot's of beginner investors really mistake the definition of investing. Often, they get caught up in a trading pattern and can't get out of it. One of the ways they get caught up is by investing in the news. The market does not react to something in the blink of an eye. Often, important news dates are scheduled for companies. People do some digging, and find out which side of the fence this news is going to be on. The price reacts to the side of general consensus long before the news is actually released.
The new “investor” comes along the day before the report or press release is scheduled, spends a quick 5 minutes on a web forum about potential diamonds in the rough and purchases the already brutally inflated stock. The next day, the press release or earnings report is either on point or is a little underwhelming. Either way, traders take profits and investors who aren't satisfied sell out. The novice hopeful are left with holes in their pockets.
They sell their stocks and move on to the next one. And they may get lucky, but over the long run they will lose. This is the definition of a Noise Trader. They are not investing, they are trading, and they are doing it terribly.
"The Dividend Yield is 15 Percent!"
It's a trap meme-----
This one hurts a lot. Mostly due to the fact that it relates very well to the old saying, if it's too good to be true, it probably is. Not all of the social media sites and forums I lurk and contribute to are dividend specific, but a lot of them talk about dividends. In fact, the dividend specific groups I am a part of are often all very knowledgeable about the income sector.
The problem I often run into when analyzing the community is people asking which dividend stocks to buy, and automatically being bombarded by some of the worst dividend stock options I have ever seen.
The dividend yield is NOT the be all end all for dividend stocks. You can't simply purchase a dividend stock with a 10% yield and expect to be retiring early. In fact, you're probably going to end up going broke.
Why? Well, these companies more than likely cannot keep up with the dividend payments. How do we find this out? Simply look at the debt to equity ratio and their dividend payout ratio. If you're looking at a stock that has a 2.0 debt to equity ratio and a 70 percent dividend payout ratio, you can almost guarantee that company is soon going to come crashing down to earth like an old growth tree.
No one is smarter than the general population when investing in these stocks. In fact, it is an irreversible error if not caught on time.
"My Uncle Made 10 Times His Investment"
I literally just heard this today. I was in a training session at work, and overheard a gentleman talking across the table about the Canadian marijuana sector and how his uncle ended up purchasing a specific stock that earned him a handsome 1000% in 6 months, and how these stocks are dropping to the point where he “has to get in” as well.
Ever heard a gambler come home and bragging about their winnings? You're almost certain they haven't won as much as they are claiming. You can also bet that they don't ever go out of their way to tell you about their losses. There probably was a cannabis stock out there that grew 1000% in that span, but I never saw one. I saw a few go 300%, maybe even 400%, so you can probably bet they're leaning to the generous side a bit.
Secondly, anything that goes up that fast in the stock market is almost surely to come back down to earth at roughly the same velocity. 1000% in 6 months is an unachievable rate even by the best of companies, and if these returns stayed steady, anyone who invested in the stock market would be rich.
So to ignore all warning signals in a severely over bloated industry and purchase a chunk of these stocks because the value has fallen 10 percent in the last 2 days is extremely short sighted, and you're more than likely going to end up extremely disappointed. Don't trust anyone with your investment decisions, regardless of how good they say they are.
"I'm Looking for Stocks in the $10-20 Dollar Range, $100 is a Bit Too Much."
This one is fairly painful as well, and I decided to make it number one because it is by far the most common thing I see. Judging a company solely on the price of the stock. The success of the stock market is generally determined by a percentage. Some years the market makes 5%, and some years it makes 15%.
Let's do a little pop quiz. “Investor A” decides that he doesn't want to spend $100 on a stock, and instead buys 5 stocks of ABC for $20. “Investor B” decides he would like to purchase company CBA, which is valued at $100 per share. Both stocks return an identical 7% on the year. Who comes out ahead?
They both made the exact same amount. Do not let the price of a stock cloud your judgment and lead to bad decisions. We have a stock on our Top Growth Stocks in Canada list called Constellation Software that is worth almost $900 dollars a share. But guess what? It's value has increased over 25% since we added it to the list, and it's fundamentals are excellent for growth. Let's compare this to a household giant and “reasonably” priced stock in most beginners eyes, General Electric. GE is simply a tire fire right now, and has lost over half of it's stock value in the last 6 months.
The point I am trying to make here is that the actual dollar value of the stock means absolutely nothing in terms of the value of the company. Two companies with identical values can have wildly varying share prices due to the amount of shares available to buy. So complete your due diligence and buy the better company!
Well, That's My Two Cents
I'm sure I will come across more errors in the future, but for now, these are the top 5 that really irritate me. The reason they make me angry is because there is so much information out on the internet today that is solid, reliable, and accurate investing advice. Use it. Learn about what you're going to be doing before you dive into the markets. This is your financial future you're investing in here. The $10 000 you lose making uneducated decisions would be worth 15 times that amount if not more when you approach retirement if you figure out how to invest it wisely the first time. Check out my guide on how to buy stocks, and get started the right way. Still not making sense to you? Don’t hesitate to shoot me an email, I'd be happy to answer any questions you have.
Author Bio: Dan Kent's investing background is completely 100 percent self-taught from a young age. He believes that extensive investment growth can be achieved by anyone at any time, the dedication just needs to be there. Dan has an extensive portfolio of Canadian dividend and growth stocks and continues to maximize his contributions to his TFSA and RRSP whenever he can. His investment journey began when he realized how much these big-bank mutual funds can chew into your investment returns. The idea of developing his own portfolio, making his own investment decisions, and simply paying nothing but the commission costs by his brokerage was the clear path to financial success.