Let me reveal right up front what most inexperienced stock investors fall for: the buy recommendation. Whether it’s from a time-tested, reputable service like The Motley Fool, a financial advisor, or from a friend – or a friend of a friend – people who know little to nothing about stocks and the market and investing can get excited as a school kid whenever they catch wind of the next “big” thing to invest in. Why? Because they easily get caught up in thinking that it’s a sure-fire guarantee of not only money, but BIG money. (Believe me, I write this from experience.)
It’s as though they believe the person or entity recommending that particular stock used a special investing-only crystal ball or some other sort of mystical power to be able to predict the future.
Here’s the reality: they’re only making a prediction and that’s all they’re able to do. They can’t be certain that the only road is up, they can only hope that it is. They can do all sorts of research and technical analysis, but at the end of the day their data is only good up to the moment – the second – that they make their recommendation to buy stock in any particular company. What happens from that second forward is unable to be predicted with certainty by anybody past or present. That includes the Warren Buffetts, Peter Lynches, and Jack Bogles of the investing world and they would all readily admit this.
In the research I’ve done in order to become the investor that I’ve become, I’ve learned that an investor is considered successful if he makes money on only 60 percent of his stock investments. If that’s the best that the best can do, then where do most people fall? I’ll leave it up to you to ponder this.
Ten investors, one stock
My point is that the returns of any one particular stock recommendation are as varied as the number of personalities that buy the recommendation. To put this another way, if ten investors bought the same stock at the very second it was recommended – at the same price, that is – over time most would eventually lose money, some would break even, and only a few would make money. One, maybe two of those who make money might even make an insanely positive return.
The one or two that might make an insanely positive return by owning stock in the very same company as those who might lose money or break even are the ones who will decide to do nothing but hold on tight during market storms like the one we’ve been enduring since January of this year (2018). The rest will succumb at various points and sell when the news gets too scary for them to handle. They will do things like try to ‘time the market’ or to try to ‘buy low, sell high,’ but in any case they will likely end up with less than if they had simply taken shelter and waited out the storm. (Again, I write from experience.)
Avoid the short-term mindset
Being a subscriber to the Stock Advisor service of The Motley Fool can turn up some interesting discussions on their members-only forums. Perhaps the most common complaint comes from newer members in the form of exasperation about how a recommended stock has dropped five, ten, twenty percent – even more – below the price it was recommended at. These are the folks that are like the excited school kids I mentioned before. They only see the potential for big money and they don’t take the time to read through the fantastic resources like the Foolish Wisdom articles that continually preach the need for patience and a long-term mindset, especially useful during a turbulent market.
As a result, they jump blindly into buying a recommendation without first considering the risks that TMF identifies, or without doing their own research, or without really understanding the company they’re investing in. Then they bemoan TMF for offering a crappy service after they start to lose money on a stock after holding it for only a few weeks or months instead of the minimum recommended 3-5 years, during which time there is a high likelihood of the stock price turning around and being much higher than what they bought it for if they would just be patient and hold on. (Currently, about 80 percent of the recommendations on the Stock Advisor Scorecard have earned a positive return, and several of those at some point were in negative territory early on.)
Focus on the long-term mindset
My favorite stories on those forums are those of the patient investors, the ones who decided to tune out the noise and be patient and eventually walk away with many times more money than they invested in a particular stock – how they held on when something scared them, knowing that storms are only temporary and that whatever held a great company down could only do so for a time. I love reading about investors who bought Netflix (NFLX) early, for example, then held until their returns on only a few thousand dollars enabled them to eventually do things like pay off their house and/or buy them an entirely brand new one and/or pay for their kids’ or grandkids’ entire college educations and/or – my favorite – retire early and wealthy!
These are the things that everybody who buys their first stock eventually wants to enjoy, but too many people blame other factors for when this doesn’t happen instead of realizing that it was merely their impatience that prevented this from happening. If you buy stock in a quality company and hold it for a minimum of 3-5 years, there is certainly a chance that you will lose money, but statistics have proven that this chance is dramatically reduced the longer you hold on. Statistics have also proven that it only takes a few or even one super-winning stock to produce astronomical returns that make up for the losses in all other stocks many times over.
Again, however, the key is to hold onto those winners for their story to play out, for several years until the return multiplies several times over, not just go up 10 or 20 or 50 percent. No truly lasting success of any kind can be built overnight or even over a couple of years, but too many people see the stock market as a ‘get rich quick scheme’ instead of what it actually is: a vehicle to grow wealth slowly. Impatient people will never, EVER win in the stock market, PERIOD.
Unfortunately, the typical investor who earns the returns just mentioned (10, 20, 50 percent) gets skittish at this point, worried that if they don’t get out, the price will drop and they will end up with nothing or, worse yet, a loss. So they get out before or during the next dip in the market, not realizing that if it is a quality company (popular product/service, well managed, profitable, growing sales, etc.), then its stock price will often surge upward after that dip and be higher than it was before.
Too many people see the stock market as a ‘get rich quick scheme’ instead of what it actually is: a vehicle to grow wealth slowly. Impatient people will never, EVER win in the stock market, PERIOD.
The Final Word
So the next time you hear or read a story about somebody who owned this-or-that stock and is bemoaning why they lost or didn’t make money, yet the stock has been a good performer over a long time frame, make sure you put that person’s comments into perspective. A loser for one investor can be a multi-bagger for another, even if they both bought at the same price on the same date. (Multi-bagger = a return of many times over, so a ten-bagger has produced a 10-times return). The difference again in this case is not the stock, but how long you hold onto it.
I hope that you will never be fooled again about this matter if you have been to this point.
If you’re a brand-new stock investor – or still thinking about it – then I highly recommend the free e-book, Should You Consider Stock Investing? It could become one of the most beneficial 30-minute reads of your life.
One last thing: be sure to click the Follow button near the top of this page on desktop or after this post on mobile. (I don’t post regularly because I believe in quality over quantity, so keep an eye on your Inbox.)
To new beginnings!