I’d been following the stock market for years by the time I could finally invest on my own. It used to cost $50 a trade with a major broker, and the fees were cost prohibitive. I waited and waited for fees to decline. Instead of trading, I researched stocks and followed prices.
When companies like E*Trade and Ameritrade were born, they slashed trading fees to a manageable $10 to $15. Suddenly, investing became a tool for a greater population. I was a teenager when I made my first trades.
Actually buying and selling — pulling the trigger on a stock — took little of my time. Most of it was spent reviewing reports and books. I read like mad from economics and investing books.
For last 15 years, I’ve heard some comically bad advice. It’s flown in the face of everything I’ve read. Sometimes it’s senseless; at other times, dangerous. If you hear this “advice,” run.
1. Buy low and sell high
I’ve heard this unhelpful tidbit more times than I can count. Usually, it’s repeated by people who understand what the stock market is: a place to buy and sell. But they hardly understand the how.
To actually “buy low and sell high” is far more complicated. The cliché presumes you can spot a low point or “bottom,” have money ready to invest, and “call” the bottom by buying in. Unfortunately, this advice can also encourage people to look for “high” points or a market top or a bubble.
Few people — statistically speaking — can accurately call bottoms and tops. Even the most trained professionals fail over and over again. CNBC anchors, analysts, and commentators regularly preach markets as being oversold and/or overvalued, but rarely are their comments checked — veracity analyzed.
While the guidance is right, I call this bad advice because it doesn’t make you a better investor. Despite the intention, this statement doesn’t help you find lows and highs.
2. Penny stocks lead to significant returns
Amidst this culture of capitalism, get rich quick schemes are everywhere. The stock market, with it’s daily returns and losses, is something of a casino for the world. With one big trade, you could be rich; at least, that’s what might be sold to you with “penny stocks.”
Penny stocks are less than $1.00 and often traded on the OTCBB — an off-market, poorly regulated exchange for little-known companies. Online scammers and tricksters tell potential investors about their regular returns and successes.
Can you believe they made a 1000% gain in a week? They became a millionaire overnight!
They’ll tell you to invest in companies — with little capital needed — and get ready to profit big time. Unfortunately, there’s no reliable way to get rich quick. Penny stocks are a surefire way to lose money. Never listen to those who are swept up in the potential percentage gains of a company’s 50-cent shares.
3. Buy the upgrade, sell the downgrade
Stock analysts might be my least favorite market players. Their salaries and decisions are closely tied to major investment banks, which can lead to a bias in their decision making. Allow me to catalogue some of my concerns.
Firstly, their decisions immediately affect stock prices — regardless of the veracity of the claims.
Secondly, many analyst ratings are a buy — all the time. Regardless of market changes, being on the sell side isn’t rewarded within investment banking companies and predicting a negative downturn is inherently risky when the market tends to go up.
Thirdly, they frequently make positional shifts without lowering prices. For example, let’s say Netflix is 95.90 per share today. A stock analyst might downgrade their position to sell, but keep a $105 price target. So, as an average investor are you supposed to hold onto that position or sell it?!
For most investors, these recommendations don’t make much sense. And trading off of them is an acknowledgement of a “rational” market. But the markets are anything but rational. Emotions constantly affect market capitalizations, and these analyst ratings fail to capture passion.
4. The entire market is going to collapse
Every day, week, month, and year there’s another threat to market returns. Maybe there’s a terrorist attack, climate change, mortgages bubbles, credit card debt crashes, unexpected bankruptcies, etc. All of these events can cause market disturbances, and even more, market mavens peddling “end of days” hypotheses.
In 2009, a powerful documentary came out called Collapse. The film interviewed a charismatic man named Michael Ruppert. He speaks emphatically about the concept of peak oil and how he alone predicted the market crash of 2008.
That’s right, Ruppert, of all men, predicted it all! And when the movie was published, most of the American public was convinced oil would forever escalate. It sat around $70 to $80, and would soon go to $100 per barrel. Ruppert was considered a genius.
His prediction was that the economy would collapse and we’d have to change our why of life — drastically.
But it never came. Instead, oil markets plummeted over the last seven years since the documentary, and Ruppert… well, he died by suicide in 2014.
Investors and abstainers frequently entertain these end of days ideas because it justifies wild investments in commodities or a wholesale avoidance of the stock market. Both decisions put portfolios in peril. Best to keep a moderate perspective and diversify your portfolio.