Five Stock Market Phrases You Should Never Utter

Investors, when talking to their advisors or friends, will often repeat common statements, often thinking there are ‘rules’ for the stock market. Well, sorry, there are no rules.

Here then, are a few statements you should avoid:

1. “I Will Wait For a Pullback In The Market”: This phrase sounds good, because who wants to pay full value? Isn’t it better to get something cheaper? Well, yes, but (a) How do you tell a ‘pullback’ from a bear market? And (b) how long will you wait to buy—and miss out on gains—if you find we are actually in a bull market? You see, you can mess this market-timing thing up on both sides. Just buy some good companies: If you have chosen carefully, they will still be good companies if the market declines a bit.
2. “The Excess Cash on The Sidelines Will Drive The Market Higher”: Um, no. If an investor buys $10,000 in shares of Suncor Inc., someone needs to sell those shares, and take $10,000 out of the market. There is no net cash impact. Sorry.
3. “I Will Take A Profit And Buy It Back Later”: We have said before that selling too early is a big problem for investors. Yes, it is nice to take a profit. But, what if your stock NEVER comes back down? Intuitive Surgical (ISRG on NASDAQ) not than long ago (less than 10 years) was an $18 stock, but had already doubled to that price. An early investor could have scored a quick 100% profit; sold and sat back to wait for a re-buy opportunity. Except now, buying back that same stock again is going to cost him $574 per share. Point made.
4. “The Analysts Say Buy, So It Must Be OK”: Sorry to all those analysts out there, but your track record is just not that good. We think analysts provide good background information on companies and their competitors, and do some good number crunching, but investors need to always remember that Bay Street analysts are not really working for them. Research reports almost always end with a ‘Buy’ rating. Sell reports do not generate much trading traction, and are sure to annoy companies and the investment bankers trying to do deals. Thus, the strength of a “Buy” rating should be diluted down. Case in point: Poseidon Concepts (PSN on TSX). This company had lots of buy ratings less than five months ago, with target prices near $20. Now it is $1.29, and floundering. We suggest you read everything in a research report, other than the actual recommendation, and decide for yourself whether it is a good company.
5. “I Will Sell When I Break Even”: This is so wrong it makes us fall over. The goal of investing, remember, is to actually make some money, not just break even and pay the high salaries of traders and brokers. We have talked to investors who own a $1.25 per share stock that has fallen from their $5.00 purchase price. If these investors truly expect to ‘break even’ then they are expecting the stock to quadruple. If we thought a stock was going to go up four-fold, we would be pounding the table to buy. These investors will likely be better off selling their losing stock, and moving on. “Hoping to not make any money” is a horrible investment strategy.

by Peter Hodson, CFA

CEO of 5i Research Inc.