The Tech Stock Investor

There is a great post at GetRichSlowly.org by guest writer Pinyo, author of Moolanomy, about the mistakes made as an investor learning the ropes. I think the article references some mistakes that are made by people even after they have “learned the ropes.” I personally have succumbed to two of these mistakes noted:

8. Ignoring diversification — Again, with little experience and little money to invest, I was going after high-flying stocks (at least I thought they were) and did not pay any attention to diversification. Like asset allocation, it took me a long time to realize how diversification helps to reduce risk and enhance performance. The value of diversification became apparent to me at about the same time that asset allocation did.
9. Selling winners and keeping losers — This was my all time weakness. I knew the concept of “buy low and sell high.” So with little experience, I ended up selling a lot of my winners like Staples (SPLS), Ameritrade (AMTD), and Microsoft (MSFT) to lock in the gain; but held on to my losers like Flemings (FLMIQ) and eToys (ETYS).

I don’t know how many times I have let my portfolio allocations slip with more money in one sector than it should be holding while that sector was sliding and dragging my performance with it. This is just pure laziness on my part and my lack of checking the allocations on a regular basis.

Number 9 on the list is also one I still get caught up in now and again. Pruning trees and shrubs encourages growth and pruning your portfolio will do the same to it. Getting rid of dead weight gives you more money to spread around in your winners or to add new potential winners to your mix. When we become enamored of a stock we sometimes fall prey to the old “love is blind” cliche since we can clearly see that darling stock slipping, but we just cannot let it go. There must be a medical term for this, oh wait, there is. It’s called insanity: doing the same thing over and over all the while expecting different results each time we try. :) Stop the madness. Prune those portfolios.

What mistakes do you make in your investing life?

During the last few years I have noticed a trend: more and more stock pickers and analyst’s are looking at stocks from more of a speculator’s viewpoint than an investors viewpoint. Read any good stock market website and you will see pundits and pickers alike touting the next darling of the market which “looks to snap back any day now.” Long ago, these people touted the dangers of speculation and (*gasp*) low priced issues.

Like the changing web, the market has turned into an even larger monster than it once was. Now it is eating investors and speculators alike in an orgy of speculative madness. There are still a lot of investors out there who are looking to the horizon and thinking about the big picture, but the more the media hammers away about the big move such-and-such is about to make, and how many points are still on the table for this stock, etc., the more investors lose their cool and dive in to swim with the sharks.

Now I do not mean to sound like I am against swimming with the sharks. After all, even the sharks have remoras swimming around picking up the little bits that they leave behind. Sometimes, however, in the frenzy of eating everything in sight, even the remoras get snapped up and consumed. The market is a lot like this environment. So if your gonna swim with the sharks, you better be ready for some madness once in a while and be ready to get out of the water in a moments notice. :)

Not long ago Alan Greenspan uttered the famous phrase containing these two words: “irrational exuberance”. Not since Concord and Lexington has such a small event triggered so much turmoil and confusion. Those two words alone just prove that a lot of people can be swayed by one man saying very little. So when a few men start saying a lot, the world should beware. This can lead to crowd madness.

The madness of crowds led to the crash of ‘29. It has also led to a few other noteworthy crashes in the preceding decades. The stock market can be as cold a mistress as the sea. She can toss a lonely investor about like so much chaff in the wind and leave him broken on the rocks. In my own personal experience, and in the experiences of a lot of folks I would imagine, most investors who “get broken on the rocks” get broken due to their own negligence and failure to research and read. “Readin’, Ritin’, and Rythmatic” have been replaced by “Readin’, Researchin’, and Readin’ some more”.

Reading and research are an investors best weapons in the battle for stock market profits and victories. Yet time and again I hear friends, family, and co-workers complain about losing money in the market. Then, of course, someone spouts that old saw about “someone always loses and someone always wins” in every market transaction. This is pure ‘bunk’, I say.

If I buy a stock at $30 a share and sell to someone at $32, who, in turn, sells at $33, then where was the loser in this transaction? Heck, even the broker wins in this one, getting transaction fees on both ends. This probably happens more often than most folks think. I have heard for years about the “loser and winner” in every transaction, and I just could never really bring myself to believe it. Hell, why would anyone stay invested in a crap shoot like that? No one would. Not saying there aren’t a few die hards with money to burn who think they can out gamble that cold mistress, because there are a lot of them, but I could not, can not, and will not, believe that every transaction leaves one investor richer and one poorer.

Anyway, rational or irrational, exuberance probably has no place in the market, or anywhere else for that matter. Exuberance is an emotion. Emotion has no place in your investing strategy. So when Greenspan made that statement, I think he was telling a lot of folks to get with the program and to get out of the crap shoot mentality. I agree. We need a lot more figureheads like that making statements just like that.