Investing Advice

the Right Way

If you are new to investing, you might have the idea that a rational person can buy stock in some promising companies, for the long term, and be happy with their investment. Nope.

When you purchase stock, the word "stress" takes on a whole new meaning. Someone who thinks nothing of blowing $100 on dinner or buying a $35,000 car, can have his whole day ruined when he reads the morning paper or listens to the radio and finds that his best stock dropped $2 a share yesterday.

The investor always reads the business section of the paper first, turning to the stock tables to see how his life is doing. Or he checks them out using his computer. This sets his mood for the day. If his stocks are up, everything is beautiful and off to work he goes with a big smile. He says proudly "I picked that stock!"

But if his stocks are down, we've got Mr. Grumpy for the rest of the day. He's telling himself:

"I shouldn't have bought that one" or "I should have sold it when it was up - taken my profit" or "why did I listen to my broker/friend/barber/that taxi driver" or "XYZ is up $4.00 today. I should have bought it. I knew it!" Then he turns on the radio and hears that the Dow is down 80 points. He shouts "darn". I have a theory that this is the chief cause of road rage.

Here are a few more real-life quotes from stock market investors:

"I shouldn't have sold that one. I knew I should have bought some more when it was cheap. Look at what it's up to now. I should have hung on to it. I knew it was going back up. I knew it!"

"It went up just because I didn't buy it" or "just because I sold it."

"If I sell it, it'll go up. If I buy it, it'll go down. It's like the market's watching me."

"I'd grab the remote, flip on CNBC and watch the ticker roll across the bottom of the TV screen, woooeee! I could watch it for hours."

Most investors become addicted to the market. It becomes an obsession. It's all they want to talk about and pursue.

And so far, we've just been describing the casual investor. Pity the poor "day trader" whose computer screen is flashing new stock prices every second. He tries to time his buying and selling to take advantage of small price moves throughout the day. A United States Senate investigation committee found that 3 out of 4 day traders lose all their money.

Since the day trader usually buys too soon and sells too late, he watches his $100,000 nest-egg dwindle to nothing as the broker takes his commission every time the trader buys or sells something. Day traders buy Maalox by the case.

I guess stock market traders fail to understand this simple principle: when you jump in and buy a stock, it will do only one of two things

  • The price will go up
  • The price will go down (it never stays exactly the same)

And you have absolutely no control over, or reasonable way to predict, which way the price will go!

Are you thinking "After reading the last page, I don't think stocks are for me. Aren't there any easy, sure-fire investments?"

Sure. Most of us are familiar with the traditional EE savings bonds, but the new iBONDS, first offered in 1998, are a whole lot better. All earnings grow tax-deferred. You never earn less than a guaranteed base rate, currently 2%. Now paying 4.4% a year, iBONDS are adjusted periodically for the rise and fall of inflation. I will repeat, if inflation goes up, your interest rate goes up too!

But you're not reading this book to learn about boring savings bonds. I really hope that you are a little more adventurous and have a bit more risk tolerance than the typical savings bond investor.

Mutual funds should be your core investments. Properly chosen, they can be safe and a sure thing. But before we explore mutual funds, we'll continue with stock market trading. But I give you fair warning, If You Already Have Enough Stress In Your Life, Your Investment Solution Is Mutual Funds, not individual stocks.

I'll give you some more reasons to stay away from individual stocks. Don't get me wrong. I am an experienced stock trader, and you too can make tons of money if you follow the investing rules that I will explain to you. But do you have the stomach to suffer occasional, discouraging losses?

When you begin buying and selling stock, you may find yourself on the greed-fear roller coaster, greed when things are going well, and fear when the market is tumbling. Hope and despair are also part of this cycle. It causes your judgment to become clouded as your emotions take over.

Other Stock Market Basics Topics:

  1. Stock Market Investing the Right Way
  2. More Stock Marketing Investing
  3. How to Pick Winning Stocks
  4. The Golden Rule of Investing
  5. Avoid Psychological Traps to Have Successful Investing
  6. Changes in Stock Values Can Be Big Numbers
  7. How to Invest Smart
  8. Stock Advice - Important Selling Rules
  9. Poor Stock Buying Decisions
  10. Market Indicators
  11. Stock Market Cycles
  12. When a bear stock market may not be a bear market
  13. Stock Index Futures
  14. Four Things that Affect Stock Valuation
  15. What is a P/E ratio?
  16. Value Investing
  17. Cheap Stocks
  18. What is a Financial Statement?
  19. Analyzing Financial Statements
  20. Stock Market Tip - Red Flags to Look For When Investing?
  21. The Annual Report How to Read
  22. Stock Market Analysts Stock Market Advice and Tips

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