How to Drive Yourself Crazy in the Stock Market
The Craigslist of China
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I’ve been writing about investing for a long time. And I know that there are many of you out there who have been reading about investing for every bit as long. Or longer.
What I have concluded about the process of writing about investing is that there is really nothing new to say. While there may occasionally be a new wrinkle—like yieldcos—the basic principles are still the same.
* If you want bigger returns, you must take on more risk.
* Buy fewer stocks for bigger returns; buy more stocks for lower risk.
* For success, you must invest your time as well as your money.
* The market wants to take your money.
But even though there’s nothing really new to say, there’s a constant need for people to hear the basics over and over.
Partly that’s because there are so many advertisers promising you something for nothing. And while you know that there is no such thing (because it would violate the Sanctity of the Marriage of Risk and Reward), it’s still tempting. If anyone tells you that stock investing is easy or risk-free, or that they have a fool-proof strategy that nobody has ever tried before, you should lock your wallet in your wall safe.
Miss Manners (actually Judith Martin, a journalist and advice columnist), who wrote many books on etiquette, had a good piece of advice for parents on how to get their children to behave. She said “The chief tools of child-rearing are nagging and example.”
Accordingly, I’ve decided not to feel bad about repeating the rules as often as necessary. I will continue to do so until I have evidence that investors are behaving themselves more responsibly. In other words, I expect to do this for the rest of my writing career.
So, as part of my nagging strategy, I’m writing about three ways that I see investors, including some subscribers to Cabot’s investing advisories, driving themselves crazy.
The first excellent way for a stock investor to achieve a state of mental unbalance is:
Don’t Know the Rules
The best way to achieve a nervous breakdown in the market is to really not know what rules to follow. Maybe you don’t know whether you’re a value investor, a growth investor, an income investor, a small-cap investor or an options trader.
If you genuinely don’t have a tool-box of investing tools, you need to get one before you proceed. The market loves to see people putting money to work on the basis of online touts, cable ranters and brother-in-law tips. With no rules, you won’t have a clue what to do if the market hiccups or one of your stocks goes into a nose dive.
Successful equity investors have rules. Some learned them the hard way and have the scars to prove it. Others figure out what their investing personality is and find a responsible teacher (like Cabot) to teach them what they need to know.
Don’t Follow the Rules
This second one is easy. Even if you’re an investor who knows what you should do, sometimes you just want to shake off your leash and take a flier on an investment that’s outside your comfort zone. Maybe you want to see what happens if you buy a penny stock that you got an email about. Or perhaps you see a big-name stock that’s just gone through a 50% correction and you think “Wow, I can buy a $50 stock for just $25!”
If you decide to give the investment a try, even though you know you shouldn’t, the market will be happy to instruct you in the error of your ways, and accept your payment for the lesson. (You may, of course, actually score big on the investment. But believe me, that’s just the market pulling you in deeper so it can teach you a bigger lesson.)
Note: Even though I’m a growth investor, I’m not going to review the growth rules for you here. You probably already know them: Market timing, defensive stops, diversification, liquidity, fundamentals, chart reading and picking buy points.
Take the Market Personally
The third way to drive yourself crazy in the stock market is to take the market’s moves personally. I can’t tell you how many investors I have talked to who genuinely believe that the market has it in for them personally. They tell stories about the stock they bought after it went straight up for weeks, then collapsed right after they bought it.
There are similar stories for people who sold stocks only to watch them pop higher soon after. Ditto for investors who looked at a list of 10 candidate stocks and picked the only one that didn’t go anywhere.
If you feel like the market watches your every investing move and then takes pleasure in pulling the chair out from under you, you’re only partly wrong. The market wants to pull everyone’s chair out from under them. That’s what it does.
And if you are consistently unsuccessful in the market, you can preserve your sanity in one of two ways. First, you can quit. You may just not be cut out for equity investing.
Second, you can try to figure out what you’re doing wrong. Because, believe me, if you’re consistently getting your head handed to you, you are indeed doing something wrong.
There are many successful strategies (i.e., sets of rules) that will allow you to make money in the market. And you can make money with any of them if you follow the rules!
I work for a company that has spent decades learning those rules for a spectrum of strategies. I’m sure we’d be happy to help you get (and keep) your sanity.
For my stock pick today, I’m turning to a Chinese stock that was featured in the April 6 issue of Cabot Top Ten Trader, a weekly advisory that analyzes the 10 strongest stocks of the previous week, screening them for price performance, liquidity, fundamentals and story. Top Ten provides aggressive growth investors with a priceless picture of what’s working in the market, and includes buy ranges, suggested stops and a write-up of why the stock is strong and what its chart is doing. It’s not an advisory for a casual investor who wants a fully advised portfolio, but it’s the best early warning system around for growth stocks.
Here’s a chart of what the stock, 58.com (WUBA), has been doing recently.
Here’s what Top Ten had to say about the stock on April 6: (click on the image to make it larger)
For further updates on WUBA and additional momentum stocks, take a trial subscription to Cabot Top Ten Trader. The advisory features a wide array of stocks and sectors you can benefit from in as little as 30 days. Our most recent issue features a diverse mix of strong stocks, including a recent IPO that has the opportunity to bring you double-digit returns in the weeks to come. Click here for more details.
Chief Analyst of Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory