Greetings, fellow investor!
Why do stocks that are way overpriced and overrated keep going up, while cheap stocks that are good often stop going up?
Most of the time, when people go to the stock market, their brains turn off and they stop thinking logically. This is dangerous and can cost a lot of money.
It keeps happening the same way. Investors usually fall hopelessly in love with a security if it makes a lot of money. But when it goes down, many of us just look at the bad news and see dark clouds in the sky. Instead of looking at the fundamental data and the company's point of view, we sell instead.
They are led by their feelings, which is a form of psychology. When the right thing to do is clear, gut feelings and hunches take over instead of turning the brain back on.
"Behavioral finance" has been looked at by science and research to find out why and how investors do things that don't make sense. They try to figure out what makes investors "tick" and why so many of them put their money in high-risk investments like OTC stocks.
During the late 1990s, people didn't pay much attention to rational thinking, and greed took over. Many people who were new to the stock market saw that the markets were going through the roof, so they bought almost any stock that promised to go up, without giving it much thought or taking even the smallest fundamentals into account. It almost felt like a must to buy securities!
During the boom of the 1990s, almost everyone rushed to buy what I call "scrap stocks," no matter how expensive they were. However, during the three-year recession that followed, no one was interested in the cheap but high-quality stocks that were being sold for "give-away prices."
This makes no sense at all! Nobody was interested in buying the best stocks that were on sale because their prices had dropped 70, 80, or even 90%.
Investors have been making the same mistakes for a very long time. They are led by how they feel. Most of them sell good stocks too soon because they are happy to have made money and don't want to lose it.
On the other hand, these same investors hold on to losing positions for far too long. They don't like selling at a loss because it means they have to admit that they made a bad investment choice. And who likes making mistakes?
But this is one of the most important lessons investors need to learn: it's only worth holding on to securities that have dropped in price if they are high quality and the chance of a turn around is more likely than not.
Behavioral finance also found that most investors make their first mistakes when they start looking for information about investments they want to make in the future.
If they think a stock will go up, they give more weight to good news than to bad news. Also, if they think a stock will go down, they give bad news more weight than good news.
Financial experts like Peter Lynch, Warren Buffett, and Andre Kostolany have always said that only 10% of what people say and think about the financial markets is based on facts in the short term. Everything else is based on psychology, and most investors, especially private ones, often make the same mistakes over and over again because they don't have a plan.
all the background noise and nonsense that they have to deal with.
If you want to be a good investor, you need to turn off your gut feelings and hunches, not your brain. And you have to come up with a plan!
To get an idea of what I mean, feel free to sign up for a 7-Day eCourse at www.stockbreakthroughs.com. It costs nothing and comes with no risks! Guaranteed!
Yours in Succeeding in Business
Ricky Schmidt
