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Stock Market Myths

Stock Market Myths
When fiascos like the Enron bankruptcy auditing scandals and analysts' conflict of interest occur investor confidence can be at an alltime low. Many investors wonder whether or not investing in stocks is worth all of the hassle.  You obviously believe in the wealth building potential of the market or you would not be reading this commentary tonight however maybe you have a relative or friend who believes in a few myths about the market. If they believe in any of the following myths you may want to do them a big favor sit down with them and set them straight.  

Myth: Investing in stocks is just like gambling. 
This reasoning causes many people to shy away from the stock market.  Gambling is a zero sum game. It merely takes money from a loser and gives it to a winner. No value is ever created. By investing or trading we increase the overall wealth of an economy. As companies compete they increase productivity and develop products that can make our lives much better. Do not confuse investing and creating wealth with gambling's zero sum game. 

Myth: The stock market is an exclusive club where only rich people make money. 
This may have been somewhat true in the past but now the advent of the Internet has made the market much more open to the public than ever before. All of the data and research tools previously available only to brokerages are now available to individuals.  There are incredible software programs available for charting and technical analysis.  Trading platforms are available to anyone with a computer.  The market is yours to conquer if you put forth the effort to learn how to succeed in the greatest wealth building opportunity in the land. 

Myth: Fallen Angels will eventually go back up
Nothing is more destructive to amateur investor than thinking that a stock trading near its 52 week low is a good buy. Many will try to catch a falling knife and predict when a stock will bottom.  This is probably the number one theory that will hurt a new investor the most.  (example) Suppose you are looking at two stocks:

XYZ made an all time high during the Internet bubble of 1999 of $100.00 but has since fallen to $10.00 per share. 
ABC is a smaller company but has recently gone from $5.00 to $10.00 and is trading at a new 52 week or all time high. 

Which stock would you buy I hope that by now you have learned to choose ABC but believe it or not the majority of investors choose the stock that has fallen from $100.00 because they believe that it will eventually make it back up to those levels again. Thinking this way is a cardinal sin and financial suicide.  If you are a trader you want to buy stocks in an up trend.  In this case you would buy ABC.  If you are an investor all things being equal you would also buy ABC.  Some investors may not agree but the stock that has lost 90% of its value has done so for a reason.  Obviously something is amiss inside the numbers or it would not have declined so much.  Buying companies solely because their market price has fallen is not an intelligent way to invest.  Make sure that you do not confuse this practice with value investing buying highquality companies that are undervalued after doing due diligence. 

This is very important.  Nothing can drive this point across better than seeing for yourself so please do this exercise.  Take a look at 5 year charts of the NT LU SUNW CMGI and AKAM declines. Imagine how much money you would have lost had you kept trying to dollar cost average down when they kept on hitting new lows.  During my visit to the east coast last week I spoke with a relative about stocks (it seems I cannot go anywhere without the subject coming up) she was telling me that she still owned SUNW and has been averaging down.  She said that her original buy was $60.00 and she reads the SUNW message board on Yahoo daily.  I cringed but I was very polite.  I did not have the heart to tell her SUNW was a dog and will never come back.  She has averaged down so much that her average cost is now $11.00. Not bad but how many more years will she have to wait for SUNW to reach $11.00 just for her to break even Meanwhile the opportunity costs hurt her while she waits. 
Myth: Having just a little knowledge is enough to invest in the stock market. 
I know a little and that should be enough to get me started. People who jump in the market with just a little knowledge are the ones who get eaten alive by the professionals.  Knowing something is better than nothing but not enough to win.  It is crucial for everyone to have a clear understanding of what they are doing with their money. It is those investors who really do their homework that will succeed.  The woman I spoke of above has very little stock market knowledge and you can see what she is going through as a result. 

Here is an investing clich What is obvious is obviously wrong. This means that knowing a little

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