Editor’s note: This article was first published in October 2010; its mention of a conversation “yesterday” with Gregorio from MyFinanzas, a finance blog of the time, refers to that period.
For some time now I’ve been receiving emails expressing a common concern, one I once had myself.
There are people who are getting started in the stock market and have heard from others about investors who went broke investing in the stock market.
Well, when I started investing in the stock market myself, I admit I didn’t prepare enough, but I was clear that it was all about a strategy as simple as buying a share at a lower price than the one I would later sell it for, so obviously I had to choose a company with growth potential and expansion plans.
Warren Buffett’s saying stuck with me. He said (and still says) that the market is driven by two mindsets: greed and fear. Warren loves companies going through a temporary problem.
Let me give a practical example: when an oil company or an airline has an accident that turns into a major disaster, investors know the share price is going to fall (FEAR), so they sell quickly. In these cases, other investors wait for the panicked investors to sell, and when the price is close to bottoming out, they buy the shares (GREED), because they know that once the disaster has passed, the price will go back up.
Why am I making this point?
Because it’s one of the basic principles of investing in the stock market, and once I knew it, I started making money in the market. That was when I began hearing comments about people who went broke investing in the stock market, and I thought: “Maybe there’s something I don’t know that’s beyond my limited understanding.”
See also: Our mindset influences our success
But that wasn’t the case. I asked what could possibly make me go broke investing in the stock market, and the truth is there was nothing, as long as you don’t make the serious mistakes investors make.
The only way you can go broke investing in the stock market is by owing more than you have, and that only happens when you invest money you need to cover your day-to-day expenses, or when you take out a loan to invest and things don’t turn out as you expected.
Otherwise, you’ll never go broke, although you may end up losing everything you invested. But if you’ve followed the basic investing advice of only investing money you don’t need, it will stop there: a bad deal and a bad investment.
In fact, and I hope some analysts don’t read this, I believe the main mistake investors make is information overload, taking in too much information. Sometimes we know so much that we forget the essentials.
Imagine for a moment that you knew every food that causes cancer. You simply wouldn’t eat bread or have a soft drink.
The same goes for the stock market. In fact, just yesterday, talking with Gregorio from MyFinanzas, I admitted to him that these days I get lost with some of the financial terms I regularly hear, which are all the rage at investor meetings, but I know the essentials: “money you don’t need, and if there are no short-term gains, switch to the long term.” That doesn’t mean you shouldn’t analyze the companies you put your money into, so that you don’t find one of them closing down.
To sum up, and to put some minds at rest: when you invest in the stock market, if you invest €1,000, that’s the most you can lose, and if you invest €10,000, exactly the same applies.
A Spanish investor told me a few months ago: “These days, analysts and investment advisers spend hours in front of a computer with four multicolored screens, and they call me a dinosaur because my methods are old-fashioned, but I made money before and I still make it now.“
So, with this myth cleared up, remember that knowledge is never a burden, but overloading on it makes us forget the essentials. New technologies are advancing rapidly and bringing changes, but to this day, investing in the stock market is exactly the same as it was 50 years ago, whatever the analysts say.
Further reading
