Insider information in the stock market should not only refer to illicit access to still undisclosed developments. It should also include lessons to be learned from observing the market.
Here are a few things to consider:
Big waves don’t lift all boats. Just because you’ve owned stocks for years, and the PSE index breached the 8,000 mark some weeks back doesn’t mean that you are now actually making money. Even when there are waves cresting, some parts of the sea may be calm, or have whirlpools where boats disappear.
The macro picture does not always reflect your micro situation. In a rising market, you may be holding the wrong stocks which are thinly traded and habitually sport red numbers to go with your Christmas socks. Just think of it. GDP may be going up at 6-7% in the macro-economy as your bank balances are dwindling. Just so you don’t think my economics is faulty, I should state here that the two concepts of GDP growth and the state of your own cash balance are totally unrelated.
“Hot tips” on stock picks should be mistrusted. The info is often given to you only after someone has already bought the stock he is pushing as a sure winner. He is asking your help to drive the price up with unusual demand. He believes in the “bigger fool” theory, where you play a part.
Behavioral economists have noted that an individual’s cash is not all mixed up in one pool. “Mental accounting” allocates compartments for cash on hand. Money intended for tuition, utilities, and next week’s groceries should be kept at hand and not invested in stocks. The cash for stocks is in another mental category. The longer time horizon for stocks, a minimum of six months, allows for well-timed buying and selling.
When deciding which stocks to sell when you need money for a trip (not a staycations), the tendency is to dump the winners. Say you have four stocks and only one is rising, guess which one you are likely to sell. The theory of “loss aversion” makes you irrational, and results in holding on to dogs and selling the gazelles. This portfolio strategy turns you into the owner of a dog pound. The hope that these dogs will somehow growl again may be wishful thinking. Most times, they turn into smaller puppies.
Averaging down is supposed to be a wise stock strategy. This entails keeping a stock that has dropped from its peak price and chasing it down to accumulate more stocks and lower average cost. Just because a stock is getting cheaper and cheaper in relation to its peak doesn’t mean it’s a great idea to keep accumulating it. It might be better to just cut losses and switch to another train going north.
There are really no experts in the stock market, only survivors. At some point, every investor gets burned. Just because they talk of their successes in cocktail parties doesn’t mean they haven’t made any bad calls. The Fence Sitter’s Law on stock conversations says, “The only worthwhile conversation is about making money, not losing it.”
The difference between being savvy and naive is not about when to buy, but when to bail. Even when you sell at a loss, this may still be a better move than holding on and selling later, at an even bigger loss. Sometimes, the timing is determined by the broker liquidating stocks to cover outstanding margins.
As in a casino to which the market is often compared, it’s best to take profits at some point and move the cash to another class of investment like fixed income bonds or property. Feeding profits back to the same class of investment is similar, though not identical, to not leaving the casino until your hoard of chips is all gone.
Sure, there is the buy-and-hold school of stock investing. A famous billionaire espouses this long-term strategy. But maybe this long term option is not available to the ordinary investor who does not live in Omaha.
You can’t spend paper profits; you have to convert it to cash. Then, it enters the realm of real life where things can be enjoyed…and shared.
A. R. Samson is chair and CEO of Touch DDB.