Topic: Penny Stocks

Misguided reasons why some investors don’t buy stocks

Don't buy stocks

Don’t buy stocks that are hyped too much, but also be aware that negative predictions rarely come true

When investment-related ideas find their way into the broker/media limelight, the focus can shift. Rather than seemingly good reasons to buy a particular stock, brokers and the media tend to popularize seemingly good reasons not to buy any stocks. This has been increasingly evident since the market hit bottom in 2009 and began rising.

Today we discuss even more reasons some investors don’t buy stocks, especially stocks that have gotten into the broker limelight.


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Misguided reasons why some investors don’t buy stocks

Here’s a short random sample of “seemingly-good-reasons-not-to-buy-stocks” that have since made their way into the limelight in the past seven years:

The sudden expansion of the deficit following the recession was sure to spark a huge revival of inflation;

The stock market is headed for the proverbial “seven bad years”;

The economy has entered a long period of “secular stagnation,” which will hold the stock market back for years to come;

The Social Security system in the U.S. is running out of money and will require huge tax increases to stay afloat;

The stock market is much more expensive than it looks, judging by the Shiller P/E ratio (this ratio uses an average of earnings for the past 10 years, rather than the customary P/E based on the latest year’s earnings, or estimates of earnings for the coming year);

The market has been going up for so long that it “has to” come down soon…

…and so on.

All these ideas made (or continue to make) some kind of sense, as do the repeated buy recommendations that you get about stocks that are in the limelight. But it takes more than a veneer of logic for an assumption to qualify as good advice. That’s true whether it exaggerates the appeal of a single stock, or exaggerates the risk of a broad market downturn.

Don’t buy stocks just to “average down”

“Averaging down” is the well-known market tactic by which investors buy more shares of a stock that has come down in price.

Averaging down does lower your average cost per share, but the fact is that it can cost you money in the long run. At the same time, you run the risk of distorting your overall portfolio management strategy.

Here are three problems that crop up with averaging down:

  1. Averaging down ignores investment quality.
  2. Hidden problems can cause a stock to fall—and keep falling.
  3. Averaging down can spell disaster with aggressive stocks.

Don’t buy stocks only if you think that you are getting a “deal”

Two-part investing exposes you to a double risk. Seemingly attractive stocks can drop for months, or even years, before a hidden flaw comes to the surface and explains their weakness.

For that matter, little-noticed stocks sometimes rise for months before the reason for their strength becomes apparent. In a lifetime of investing, you’ll choose both kinds of stocks.

If you always try to buy below the market, you’ll always get a “fill” on stocks with hidden flaws. They’ll always come down into your buying range ….and they’ll keep on falling.

But you’ll never get to buy the other kind of stock—the kind that keeps going up. These stocks will always seem too expensive, and they’ll go on to get even more expensive. But you need a few of these ever-more expensive stocks to offset the losses from those that get cheaper and cheaper.

There’s no easy answer to the buy-now-or-wait dilemma. At times it may pay to hold off—for instance, a company’s stock will often rise when it announces a stock split, then fall after the split takes effect.

In the end, if a stock is truly worth investing in, you should be willing to buy it at current prices, even if that means you run the risk of having to sit through a 5% to 10% setback. Before it slips into its next 5% to 10% setback, after all, it may first go up 50% to 100%.

Don’t buy stocks based on market timing and predictions

Chains of pessimistic decisions like this can keep you out of a rising market for years at a time. That’s why your best bet is to downplay market timing and predictions in your investment decision-making. Instead, control your risk with the help of our three-part Successful Investor strategy.

In the long term, it does a much better job than predictions, and often makes money for you in the short term as well.

If a broker told you to not buy a stock because it was in the limelight, but your intuition told you yes, would you still do it?

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