It is becoming increasingly popular to buy and sell investments because a certain individual tells you to do so. People will rush out and buy gold because Jim Rogers is forecasting the death of the dollar. People will bid a stock’s price up to its 52 week high because Jim Cramer says to buy it. People will invest in the stock market because a financial television personality says that the market is cheap. While you can watch the actions and listen to the ideas of other people, finding the best investments to fit your personal portfolio is a task that is best left up to you.
Here is my list of the 10 people and places that you should avoid when choosing investments.
1. Retail Investors
Retail investors are the general investing public. They are the people who buy and sell securities for their own accounts. Most individual investors buy and sell stocks through mutual funds. You never want to follow retail investors because they are notoriously late to the party. They buy securities when they are trading at their peaks and sell when they are trading at their bottoms. Never follow the investing public. The best time to invest is when their are huge outflows of cash from the mutual fund market. This gives you the best chance of investing near a market bottom. Start selling when you see large inflows of cash into mutual funds.
2. Penny Stock Spam Marketers
Have you ever received an email advising you that MNO Company is skyrocketing and poised for explosive growth? The email will tout that this stock is up 5000% over the past year. It is marketed as “the stock that Wall Street doesn’t want you to know about.†The truth is that is a bunch of crap. Many times these emails are from marketers running a pump and dump scheme. They get investors to buy penny stocks so that the price is artificially inflated and pumped up. The marketer and his buddies then dump their shares on the open market causing the stock to crash.
3. Uncle Bob
Everyone has an “Uncle Bob.†This is the relative who believes that they are a money management expert. They blurt out the name of generic overvalued investments and tell you to follow their advice. They always knows of some investment that will put you on the path to riches but their advice has never actually worked for them. The safest thing to do is nod your head in agreement with Uncle Bob and dispose of his advice as quickly as possible.
4. Internet Message Boards
Stock message boards are flooded with traders trying to persuade investors to buy or sell shares of a stock. These traders care nothing about the people that they are advising. They are just trying to swing the price of a stock so that they can benefit from it. Company executives and insiders have been found disseminating false information on message boards. In 2005, John Mackey, CEO of Whole Foods Market was caught on an Internet message board trying to drive down the price of Wild Oats. He made negative comments about the company so that Whole Foods could buy Wild Oats cheaply. The best thing to do is not act on any advice that you get on Internet message boards.
5. Hedge Fund Managers
The moves of hedge fund managers are often followed by mutual fund managers and investing enthusiasts. They try to duplicate the investment results of John Paulson and other famous hedge fund managers. The truth is that it is close to impossible to replicate the results of hedge funds. Hedge funds have the advantage of being able to take long/short positions and can actively buy and sell stocks from quarter to quarter. You never know exactly what price the manager paid for the stock and if he even still owns the company. By the time that you find out that Paulson has gobbled up shares of Airgas Inc, he may very well be unwinding his position.
6. Financial News Networks
Sometimes while watching Bloomberg or CNBC, you will see an expert recommend that investors should buy a stock right now. Remember that while you are watching a particular program, there are millions of other people watching as well. You never want to buy a stock that everyone is trying to own a piece of. The best thing to do is jot the stock’s name down on a piece of paper and revisit the idea later. Keep an eye on the stock and check on it from time time. You may be able to buy the same stock at a much lower price a few months or a year later.
7. Magazine’s Hottest Mutual Funds Lists
Fortune, Forbes, Kiplinger’s and other financial publications always run a hottest funds column in their magazines. This column shows the best performing funds over the past year and the last five years. These mutual funds see huge inflows of money after the publication of their results. Large amounts of cash are often a fund manager’s worst nightmare. Fund managers have to do something with the cash and are forced to buy large cap names that have less growth potential than smaller stocks. They may also be forced to make stock purchases at higher prices so that they are not holding too much cash when quarterly statements are mailed.
8. Hot Stock Tip Guy
Hot stock tips are fun and exciting. You feel like you are getting a leg up on the market because someone whispered an inside stock tip at a party. The truth is that most hot stock tips turn out to be bogus information. The only people that really have access to secret information would be guilty of insider information if they disclosed it. The best way to find a great investment idea is by doing your own research.
9. Jim Cramer
It’s nothing personal against Jim Cramer. I actually like his Mad Money show but too many investors follow his advice religiously. When Cramer recommends a stock, investors will run to buy the stock in the after hours market the very same day. They buy the stock at whatever price it is trading at. They neglect to research the investment and have no entry or exit strategy. This isn’t Cramer’s fault. He advises investors not to blindly buy a stock but many of his followers do it anyway.
10.Your Emotions
Too many people make investing decisions based on either fear or excitement. If a stock surges suddenly and is up 25%, greed will make you buy shares. If a stock is down 25%, will drive investors to dump the stock immediately. I don’t know what it is about the green and red arrows that run on the bottom of the television screen but it has an effect on investors. Green arrows pointing up make investors anxious to buy shares. They feel as if a stock has momentum and is can only keep going up. Red arrows pointing down cause investors to panic and they assume that it is headed straight down to zero. It’s important to make investment decisions from a rational place.
I am not saying that you can not learn anything from some of the aforementioned sources. You can always learn something from just about anyone. I have found however that the best thing to do is to offer go against the grain when investing. Your opinion should matter far more than that of anyone else. Whenever you see public sentiment for an asset class going one way, you should consider going in the opposite direction. The best thing to do is find a strategy that works best for you because you are the one that ultimately has to live with the results.
Does anyone influence your financial decisions?
10 People And Places That You Should Never Follow Investing is a post from: Buy Like Buffett
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