Ten Most Dangerous Things People Say About Stock Prices

There is an article about Peter Lynch, the famous manager of the Magellan Fund from 1977-1990, at Gurufocus.com, written by Kaushal B. Majmudar from The Ridgewood Group entitled, “The Wit and Wisdom of Peter Lynch.” I found the “Ten Most Dangerous Things People Say About Stock Prices” a great reminder about the uncertainty in the stock market:

In addition to the above points, Peter also shared his Ten Most Dangerous Things People Say About Stock Prices reproduced below. Even more than the points above, Peter’s good sense of humor came through when he discussed these old saws:

1.) “If it’s gone down this much already, how much lower can it go?” (answer: Zero)

2.) “If it’s gone this high already, how can it possibly go higher?” (some of the best companies grow for decades)

3.) “Eventually they always come back.” (no they don’t – there are lots of counterexamples)

4.) “It’s only $3 a share, what can I lose?” ($3 for every share you buy)

5.) “It’s always darkest before the dawn.” (Its also always darkest before it goes absolutely pitch black. Don’t buy a business just because price dropped and it is cheaper now)

6.) “When it rebounds to my cost, I’ll sell.” (The stock does not know you own it! Don’t take it so personally Note: this comment is explained by the well documented psychological tendencies called loss aversion and anchoring bias which are talked about in Behavioral Finance. If you liked it at ten, you should love it at 6 so either buy more or sell)

7.) “What me worry? Conservative stocks don’t fluctuate much.” (There is no such thing as a conservative stock – the average stock fluctuates between 50% to 70% from its high to its low price every year. There is a graveyard where all the “conservative” stocks get buried. Companies and businesses change!)

8.) “Look at all the money I lost – I didn’t buy it!” (Don’t beat yourself up about the missed opportunities because it is not productive – when he managed the Magellan Fund, he almost never owned one of the 10 best performing stocks in a given year, but he did fine anyway).

9.) “I missed that one. I’ll catch the next one.” (Doesn’t work that way)

10.) “The stock has gone up – so I must be right” or “The stock has done down – so I must be wrong.” (Technical analysis is not worth much. So many people like something at 20 and hate it at 12 – never made much sense to him).

Peter’s fundamentals, like those of many other super investors are grounded in common sense and an understanding of human misjudgments and failings.

What many of these points tell us is that buying cheap stocks alone won’t get you any success; you have to invest in cheap stocks of good companies. This is very hard to do and takes a lot of work. For me these points serve as a reminder that I (as well as many of you I imagine) should never try to pick stocks myself (unless it’s with a small portion (<5%) of my portfolio). Unless I can devote my entire day to investigating companies, I should let the professionals do it, or stick to investing in indexes.

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