Editor’s note: This article was first published in July 2013, and its IBEX 35 levels, heading for 9,000, then down to 7,500 and possibly 7,000, refer to early-to-mid 2013.
In circles of experienced investors and market professionals, you can tell a seasoned investor from a beginner just by hearing them say certain phrases.
It’s true that all of us have thought this way at some point, so knowing these phrases in advance will help you not only avoid coming across as green, but also remember that, in that moment, your thinking may be driven by something other than logical reasoning about investing.
1. “My investment in company X is a safe investment”
False. Neither in the short term nor in the medium-to-long term is anything safe in the stock market, unless you have information nobody else has (and even then it wouldn’t be a safe investment). Any company can hide serious problems from its investors. Cases of cooked books do happen (Pescanova, Bankia, Enron…). And even the most solid, profitable company can take a hit nobody expected.
If you don’t want to come across as a “green investor”, change those words to “The probability that my investment in company X will deliver high returns is extremely high.” In the end, the stock market is mathematics: probability and statistics.
2. “Now is not the time to buy. The market has fallen a lot and is very bearish”
Which stocks is it not the time to buy? Because the only way to buy some stocks cheaply is during a fall. If our plan is to invest for the long term in a company with good fundamentals, the ideal is to buy it during a fall. That said, as Warren Buffett put it, buying stocks while they’re falling is like trying to catch a falling knife.
The point is that we have to analyze whether the stock has already fallen to a price we consider an opportunity. Sometimes, by waiting, we’ve seen the rise begin and ended up missing out on a percentage of gains. Our colleague Victoria Bernal always advises, in these cases (when our stock is falling), investing half of what we had planned. If the fall continues, we go in with the other half. Still, remember that the biggest long-term gains are made by buying in very bearish markets (always choosing the right stocks). I know many people will disagree with this view, but it’s open to debate. This is the investment strategy David Tepper and John Paulson followed to make billions: they bought the most unpopular stocks of the moment (unpopular but sound).
3. “My portfolio is very well diversified within the IBEX”
That isn’t diversification, because with few exceptions, if the index (the IBEX 35, Spain’s benchmark) collapses, most stocks go down with it. To begin with, over-diversifying isn’t smart. As Warren Buffett himself says, “Diversification is protection against ignorance.” When investors talk about diversification, they really mean investing in different products and splitting our investment into percentages across stocks, bonds and other markets. If you buy 10 IBEX stocks, that isn’t diversifying. Focus on just 2 or 3 stocks and you’ll have a better chance of juicy gains (provided you pick well). Read: What is the most profitable portfolio diversification for success?
4. “Today I made 1,500 euros on the stock market with the shares I bought”
You made €1,500 today. But did you sell them? “No, I’m holding them for the long term,” they reply. Then you didn’t make anything today, just as you won’t have lost anything when they go down. In stock market investing there are no gains or losses until you sell your shares. The market goes up and down every day, and that doesn’t mean we’re making and losing money every day. The only people who can talk about daily gains or losses are traders, who usually close their positions at the end of the session.
5. “I know for sure the market will go up by the end of the year”
A serious display of ego, because nobody knows what thousands of investors and automated machines are going to do, just as nobody knows what surprise news or statements may come out tomorrow or next week. We’re back to the same point: through technical analysis or statistics, we can talk about probability. Even top professionals fall into this mistake; as human beings, they forget that nothing is certain and that in the stock market you have to allow some probability for a scenario in which the most unexpected can happen. Remember that a few months ago the IBEX was heading straight for 9,000 points and some people said we were going to miss the rally, but in the end the supposedly less likely scenario played out: it went down to 7,500. Most likely it will keep rising, but there will always be a chance we fall even to 7,000 points. An unlikely scenario, but a possible one. And really, nobody knows. Neither do you.
Further reading
Featured image: Federal Bureau of Investigation (FBI), Public domain, via Wikimedia Commons.
