There are now TV programs and seminars focusing on personal investments. Their goal is to teach the novice the vocabulary and grammar of the arcane world of finance and economics. The assumption is based on already having extra money to invest. How to earn it in the first place is the subject of other programs on entrepreneurship.
Nothing demonstrates investment ignorance more than news of yet another financial scam that has transferred wealth from a large group of people with money to a smaller group of con artists. Few have learned the lesson of common sense that if it’s too good to be true, it is probably a fraud.
Sometimes, some of the victims are supposedly savvy individuals, which only means that sometimes greed and the desire to accumulate wealth trump accumulated knowledge.
Still, finance for beginners deals with some clichés; even if some the advice seems sound, if not obvious.
Buy low, sell high.
This hoary guide to the stock market is simplicity itself. After all, one can only make money if the cost of buying is lower than the price for selling. Even discounting the broker’s fee and transaction tax, this axiom is not that easy to implement. High and low are relative concepts. A stock that has been rising in price may still be a good buy in terms of an even higher upward lift.
On the other hand, a plummeting stock is not always something to pick up simply because it is now priced at its 52-week low… as it may continue to drop even more.
Always, the key is when to sell.
In certain situations, buying high and selling low (yes, that’s not a typo) can be a rational move to cut losses in a falling stock.
What about the phrase, “seller’s remorse?” This non-religious feeling is seldom discussed in finance programs for beginners.
Because the amateur is fond of bragging in the gym about gains made in the market, including accumulated paper profits (theoretical gains still unrealized if a stock is unsold), he is especially susceptible to this particular form of regret. Say, he sells out his favorite stock when reaching a 100% gain; does he continue to track its journey, sometimes to ever inherit levels? Sure. Then, his 100% gain seems puny when the price keeps going up to as high as five times his original investment.
Remorse, or the feeling of having done something that requires forgiveness, sets in. The opposite of this comes later as he tries to buy the stock back as it rises only to have it finally correct after he buys. Then, his old profit is eaten away and he experiences the opposite feeling of “buyer’s remorse.” His old profit can be turned into a loss.
Looking back seems irrelevant when dealing with stocks, as in most things in life, like soured relationships. Get that loss out of the mind and proceed to the second round, as they say in college basketball.
Rookie investors looking for guidance like hot tips. On the basis of unconfirmed plans of pending acquisition, stock buy-backs or a follow-on offerings, the newbie accumulates a particular stock. Insider trading, a variation of the hot tip, seems more sure-footed. It refers to undisclosed information for insiders to gain undue advantage over the uninformed public. This illegal practice is seldom even commented on in the local market but is a serious offense elsewhere.
Also, the “fallacy of early success” (or beginner’s luck) affects the novice investor. Quick gain from a tipped stock that surges up after purchase endows the rookie investor with an undeserved feeling of invincibility. The false confidence increases when he outperforms more experienced investors… in the short term.
Low returns from traditional savings instruments have driven investors and retirees to the stock market. This is healthy for an economy’s capital formation. But is a casino mentality towards the market healthy?
Even experienced stock pickers and index investors of mutual funds try to educate their potential clients that there are risks involved in the equity market. What is their appetite for it? What is their time horizon for investment ?
Personal finance advisories should be about conserving wealth as well as growing it. Still, even putting cash under the mattress has its risks and not just insomnia from a lumpy bed.
A. R. Samson is chair and CEO of Touch DDB.