Most investor sayings and clichés have at least a hint of truth. But they can still lead you to take good or bad investment advice, depending on how you apply them.
For instance, you’ll sometimes hear investors say that you shouldn’t fall in love with your stocks. This seems to make sense. You should keep an open mind on your investments, rather than falling in love with them and holding them forever, despite any adverse changes in their business or the field in which they operate. However, investors sometimes use this tidbit of advice as a justification for selling a stock that has shot up unexpectedly.
Unexpected strength in a stock you like is a bad reason to sell
The stock may be stronger than you expected because you underestimated the growth potential or competitive advantages that led you to like it in the first place. Experienced investors can tell you that some of their best stock picks started going up out of proportion to what they expected, and kept outperforming for years. By the time the first significant “dip” or setback comes along in a stock like this, it may have tripled.
When a stock you own is unexpectedly strong, resist any impulse you feel to sell, even if you like the idea of “nailing down a profit.” Instead, look at it closely. See if you can find any good reason to sell, apart from the fact it’s beating your expectations.
If you can’t find any good reason to sell, hang on to it. Maybe your expectations are just too low.
Bad advice includes unsatisfactory reasons for selling stocks
To decide when to sell on bad news, you need to develop perspective. You need to be able to tell if the company has hit a bump in the road or gone off a cliff. Here are a few bad reasons to sell stocks:
- Weak quarterly earnings report: One quarter of weak profit may simply be a normal fluctuation. By the time the news of a weak quarter comes out, it may have already had its impact on the price of the stock.
- Strikes: A single strike rarely puts a lasting dent in a company’s profitability. However, chronic labour troubles are a bad sign and may be a good reason to sell.
- Environmental, regulatory or anti-trust problems: These laws are complicated and constantly changing through court and bureaucratic decisions, so it’s easy for well-meaning companies to run afoul of them. Also, unethical companies sometimes raise these issues to hurt their competitors.
You’ll make your investment life easier and more profitable if you mainly choose high-quality investments with honest managers and established profit-making, reputable businesses. You can make money by holding these stocks and collecting dividends over long periods, even if you sit through lengthy price setbacks.
3 investment “strategies” that will put your retirement goals in jeopardy
Stock option investing
Stock options are not a smart idea if you’re headed into retirement. Stock options are expensive to trade. You pay commissions each time you buy or sell stock options. Commissions eat up a large part of any profits you may make with stock options, particularly if you trade in small quantities. Options can also be rendered worthless as every option has an expiration date.
To profit in stock option investing, you have to be right in three different ways: price direction, price-change magnitude and time—and that’s virtually impossible to do consistently.
Investing in junior mining stocks
Junior mining stocks are highly speculative, and are apt to cost you money. It’s relatively easy to launch an exploration program and sell stock to the public. So the junior mining promotion business attracts more than its share of unscrupulous operators and stock promoters. Putting your savings into the type of business that has a million to one chance of striking it rich is not a retirement investment strategy, it’s gambling.
Investing in penny stocks
Penny stocks tend to be speculative, and are engaged in such things as finding mineral deposits that can be mined at a profit, commercializing an unproven technology or launching new software. They are unproven companies that have very little chance of becoming a sustainable business. You’ll also have to be on the watch for unscrupulous stock promoters who will over-inflate earnings and talk up a stock for their own best interests. If you’re headed to retirement, stay away from penny stocks.
What bad investment advice have you heard throughout your career? Please share your experiences with us in the comments.
Pat McKeough has been one of Canada’s most respected investment advisors for over three decades. He is the founder and senior editor of TSI Network and the founder of Successful Investor Wealth Management. He is also the author of several acclaimed investment books. This article was first published in October 2016 and has been republished on the Hub with permission.