Stock Market Investing – Top 10 List of Statements Clients Make to an Advisor

1) When my investment gets back up to what I paid, get me out.

This is surely a big mistake. That stock has no idea that you’re waiting for it to go up so that you can sell.

In some instances, getting back to your “even” is just the beginning of it reaching new highs. At other times, getting back even to be a sign to get out. But if the investment has poor fundamentals, it is wise to get out without even getting back to even. Sometimes, it is better to cut your losses and move into a higher quality investment instead. Not all investments are solid forever, and things change, so it is important to keep up with the fundamentals of the investment.

2) The stock is selling at $3.00 a share. How much can I lose?

$3 multiplied by the number of shares, oh yeah, don’t forget to add in commission if you paid those as well.

If you take a gamble on 100 shares of a $3 stock with poor fundamentals, you could be looking at losing the entire $300 you invested. But just because a stock is selling at a low price does not mean it is not worthy of investment. This is where a fee-only Registered Financial Consultant can be a handy resource and assist in examining the company to see if it is a stock with upside or if it truly belongs at $3 with little to no chance of advancement.

3) I want to buy shares of XYZ Company. Three years ago, they were selling at $60; now, the stock selling at $5.

You can make a lot of money investing in good companies when their stocks are out of favor (go to Google – lookup: “Warren Buffett” or “Value Investing). You cannot make money buying junk just because it’s cheap. This goes hand in hand with item number two or buying a stock at a low-price level because it is low. After careful analysis by a Registered Financial Consultant and your homework, you determine that the company’s underlying foundation is solid and have deduced why it is low there could be a buying opportunity at hand. But if the price is at that level because the company’s foundations are not there, it is a stock to avoid at all costs. Even if it once was a reliable company.

Here I think of a company I once invested in that sold mid-range women’s clothes and had recently split a few times and was on an upward trajectory that seemed promising. However, the company missed a single quarter’s earnings, and the stock reacted in an anticipated manner but appeared to be still solid. Unfortunately, the missed quarter was one of many, which has led this stock to the land of mediocrity, where it has been for the past decade. The lesson here is if a high-flying company misses on estimates in consecutive quarters, you must dig deeper and understand if this is the start of a long-term trend or an anomaly and will resume its price appreciation.

4) The stock is up 10% in the past month.

It’s too high, and I can’t buy it now.

Have you ever heard of a long-term uptrend? Just because you missed the bottom doesn’t mean you missed the boat. I’ve heard that the shortest time measurable by man is the time between when it’s too soon to buy a stock and when it’s too late.

Around 2009 Berkshire Hathaway’s B shares had a 50:1 split resulting in an adjusted price of approximately $70 a share. Since then, it has rarely been that low again and closed the day before Thanksgiving 2020 around $233, https://finance.yahoo.com/quote/BRK-B. The best time to buy the stock would have been at the split at $70 a share, but even after 100% appreciation to $140 a share, it would have still been a solid buy as it has now gone well above $200 a share resulting in a nice potential profit.

5) I paid $60 for that stock three years ago. Today it’s selling at $4.

I can’t afford to sell. I don’t want to lose so much. I’m just guessing here, but did you say the same thing at $30? $20? See items two and three here as they play an important role in this point as well.

Yes, rarely, a stock that once traded at $60 and is now at $4 will ever bounce back if the fundamentals are poor. But if there are broad reasons why the stock had dropped that are not necessarily due to the company, such as the Great Recession of 2008-2009 where a solid American Express went from around $50 to below $10 a share, it presented a buying opportunity for those who were on the lookout for value during the panic as the day before Thanksgiving 2020 American Express closed over $120 a share, https://finance.yahoo.com/quote/AXP?p=AXP. But if there are severe underlying factors that caused the stock to drop in such a manner, it is wise to cut your losses and move on.

6) I bought the stock at $10, and now it’s $35. I have too much profit.

I can’t sell it here. I don’t want to pay so much in taxes. My wish for everybody is that you have more than twice the profits next year and that you have to pay twice as much in taxes. Here I hope you realize that this is a good situation to be in and not a bad one. And I hope that your investment is in a tax-sheltered account, rendering taxes a moot point at the moment.

But regardless if you have a brokerage account and have experienced a nice run-up in a stock price, it is always a good thing to consider taking some of the profits. That is provided that you have owned the shares for at least a full year so that they are taxed at the much lower long-term capital gains tax rate and not with your ordinary income as would be associated with a sale of stock that you owned less than a year. Here timing is the key, and never worry about the taxes. If you are concerned about losing some of your profits can minimize the tax bill to a degree.

7) I never sell an investment at a loss. I’m a long-term investor. Eventually, they always come back.

Ever heard of ENRON? Pan American Airlines? Polaroid? Penn Central Railroad?

If I were your advisor for the next 20 years, I GUARANTEE you will have losses. Losses are a very important part of a successful investment program. Since the perfect human hasn’t been created yet, the perfect advisor hasn’t been created yet. Expect to have some losses and plan accordingly. The key is to act accordingly and know the fundamentals of your positions to minimize any future losses.

8) Sell my utilities; buy DOTCOMS.

Advisors heard this a lot, just 20 years ago. Every up-cycle investment advisor is instructed to sell safe but dull investments and buy something with sex appeal that’s moving. The worst possible things have happened – one of the clients’ friends or acquaintances is making more money than they are.

It’s the CINDERELLA story. They’ll look great for a short time. Then, the clock strikes “OVER,” and their limo turns back into a pumpkin.

Here you can substitute almost any IPO as the Cinderella of our story as the majority will appreciate for a short time then tumble back to the original IPO price or even go past that point. The majority of IPOs are not the home run that people hope for, and even when they reach home run status, chances are the road was a bumpy one. One of the few exceptions to this that I can think of was Google. Even Facebook had a rocky beginning before it took off to the levels where it is now.

9) I know as much about the stock market as any broker.

What would you think of me if I came to your place of business and told you that I know as much about your business as you do?

Can you outperform a professional in the short run? Absolutely.

You would never say this to your doctor, lawyer, or accountant? You wouldn’t even say that to your butcher or your barber. Stock market investing is the only profession where the amateurs think they know as much as the professionals because they might have picked a few winners over some time.

10) That total stranger made the investment sound like such a great idea.

Of course, he did. That’s his job. Do you remember your mother telling you, “Don’t talk to strangers.”? When was the last time you ran with scissors?

If you develop the practice of giving your money to strangers, you will come to harm sooner or later. Or, as Al Capone used to say, “Anybody found sleeping in the trunk of a car deserves to be shot.”

The key here is to avoid unsolicited advice and always listen to people you know to be ethical and competent, such as a fee-only Registered Financial Consultant. I rarely will make individual stock recommendations to my clients. I will generally look for Exchange Traded Funds (ETF) or mutual funds selling at discounted prices and show real appreciation potential. Go to this previous post as an example, https://kgmeyerpc.com/schwab-fundamental-emerging-market-large-cap-value/. It is always better to buy a pool of companies out of favor rather than gambling on a single company. But if you do want to invest in individual stocks, please do so with assistance.