Scrolling through my news feed earlier this week, I found a post that provoked quite a buzz on Facebook. In one of the investing communities I am a part of, a member was seeking advice from the group on whether he should invest in a particular stock. Asking for advice or commentary on stocks is a familiar occurrence in online groups and forums, but this post struck me as somewhat different to the usual posts I read.
The commenter, which we’ll call John for the sake of this article, said he wants to buy a cheap stock because he has a little "gamble/fun" money available.
• CYNX is the stock he had in mind.
• He was asking for commentary on the stock or any suggestions on another stock.
• His primary goal was to "gamble on a stock" rather than invest in a valuable opportunity.
• He is out to have fun with this investment, not looking for a safe investment.
• He is interested in finding a company "to get lucky on and make a couple hundred bucks or more, quickly".
• But he doesn’t want to make a careless guess.
John is looking for a quick buck, but in reality, all he is going to find is disappointment and a big hole in his wallet where his “fun” money used to be.
I had to take the opportunity to elaborate on why this is the worst possible approach to take when investing in equities by identifying common misconceptions portrayed in his post.
Misconception #1: Let’s take a gamble on the stock market
If you are looking to gamble, try your luck hitting the slot machines at your local casino. The stock market is not the place to gamble unless you want to lose your retirement fund.
If you want to create wealth, on the other hand, the stock market is the place you want to be. Adapt a safe and rewarding approach such as value investing. Buy stocks at a discounted value and hold on to it until the tides turn, rewarding you with a handsome percentage of return-on-investment.
Misconception #2: Investing in the stock market is fun
If your definition of fun is to lose money on the stock market, you should do what John plans on doing. If you share the same idea as I do, where “fun” translates to making money, it should be clear to you that investing isn’t about having fun, but about creating wealth. You find joy in beating the market time and time again and being able to fund your retirement or your children’s future education.
The most boring stocks are the highest returning stock. It is stocks that you buy and hold (almost forever) until it appreciates in value. The less actively you trade, the better your overall returns will be, because you are cutting down on trading expenses such as fees and taxes. To ensure you effectively manage your value portfolio you need to make use of a checklist. Feel free to use my checklist as an example.
Misconception #3: I heard ‘XYZ’ is a great stock to buy, no need for further research
If John went so far as to search CYNX on Google he would have found why investing in this stock would end in utter disaster. He went as far as asking the opinions of other investors on an investing community page, but how accurate is the advice you find in these groups really? Some advice may be good and others terrible. It is difficult to distinguish fact from noise in an investment community, so rather not make hasty decisions without doing the necessary research.
I can’t stress enough the importance of sufficient research. Read, read and read some more. You have to make sure you understand what the company does, in which industry it operates and whether it is the flagship of its industry or not.
The only way to determine whether you are making a good investment decision is to base it on adequate research. Read a company’s earnings report, balance sheet, income statement and cash flow before you buy options in the company.
Misconception #4: I can make a quick buck on the stock market
Making a quick buck is the fundamental flaw in John’s approach. The stock market isn’t the place where you make a quick buck overnight. You are better off trying your luck with a Lottery ticket.
It might be possible to make a few extra dollars overnight, but the risk that goes along with it is akin to gambling, where one in a million people win. Most people lose money trying to do so and end up learning absolutely nothing at all.
Investing is all about creating wealth over time, making use of the laws of compounding interest. You should always try to invest sooner rather than later while you still have time on your side because time is an investor’s best friend.
Investing can be easy and effective if you are realistic about it and follow an appropriate strategy from the get-go. Don’t fool yourself by taking shortcuts. Put in the necessary effort now and enjoy the fruitful rewards later. Nothing tastes sweeter than financial success.