Are You Making One of the Most Fundamental Investment Mistakes?

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Sam Seiden

19 Aug, 2016

in Psychology and 1 more

Compare the average investor’s returns around the world to the average Wall Street firm’s returns. I think we would all agree that the average Wall Street firm is making the lion’s share of the money, while the average investor hardly ever comes close to achieving their financial goals. Next, think about what the average investor does in the markets; they “buy stock”. Now, think about Wall Street’s primary business; they “sell stock”. Hmm… One group is selling and producing very high returns each year, and the other, who is buying, struggles financially. And, this is happening in a market that typically goes up. Understand that I am not at all suggesting the average investor should stop buying stocks and start selling. What I am strongly suggesting is that the average investor needs to start “thinking the markets” like Wall Street does. This is because it is one of the most common investment mistakes.

Let’s think about how people around the world are conditioned to invest/trade. Whether the education comes from grade school, high school, university, graduate school, professional advice or conventional fundamental and technical analysis, people are always taught to buy the same way. The typical rules for buying are:

  1. Make sure the company has a good balance sheet
  2. Make sure the company has good management
  3. Make sure the company has good earnings
  4. Make sure the stock price is in an uptrend

Which of the common investment mistakes am I referring to? Well, when all these items are true, conventional education tells us to “buy the stock”. This is what everyone is conditioned to do at every level of education from a young age. Let me ask you, when all these items are true, where do you think the price of the stock is? It is hardly ever going to be cheap when this “must have” list is present. Most of the time, the stock price will be very high, at retail prices.

We all make investment mistakes, but this is one you can eliminate easily to improve your trading success.

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Now let’s consider the basic lesson of how you make money buying and selling anything. The most profitable retail companies in history have mastered the art of buying at wholesale prices and selling what they bought at higher, retail prices. They simply repeat this process over and over and over. Think about the people you know who are smart shoppers when buying anything. They cut coupons, look for sales and negotiate for lower prices. This is also what our parents try to teach us during our development years. This also happens to be EXACTLY how Wall Street thinks. That’s right, Wall Street might make investment mistakes from time to time, but they don’t make this one.

The major issue here is that how we are conditioned to buy and sell in every other aspect of life and how we are taught to buy and sell in the markets are opposite. When buying and selling anything in life outside of the trading and investing markets, we all try to buy at wholesale prices and sell at retail prices (homes, cars, whatever). When buying and selling stocks, for example, most people buy at retail prices and sell at wholesale prices. Then, the average investor spends their life scratching their head because they can’t make this concept work; while the Wall Street mind laughs all the way to the bank.

Consistent low risk profits from trading and investing is a challenge many millions of people take on, yet only a select few are ever able to attain. The objective and mechanical rules for consistent low risk profits are very simple, yet the layers of illusions keep most from ever seeing what is real in trading and investing.

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Re: Are You Making One of the Most Fundamental Investment Mistakes?

Problem is Sam, Value moves price. Value is not determined by where the market has traded before. Once you determine value then you'll be better able to know whether a price level will reverse or not.

Sep 08, 2016

Member (148 posts)

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