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Hope you haven’t frowned seeing the title. There are many who invest in stocks out of compulsion or impulses. This article is for those. I generally tend to write about people who are like me, middle class, having some money to enjoy life but, mostly trying hard to maximize money’s worth.
People like us, do not usually have money for buying stocks on impulse. Still, it almost happened to me last week. I was on the verge of buying into Facebook on the opening day.
In the end, I did resist myself against buying the Facebook stock. Not that Facebook is a bad investment but, the whole affair was nothing else than impulse buying. I didn’t study the valuation, I wasn’t reading analyst reports. I was just buying it, for the sake of it. Giving in to the hype and hoopla.
It happened to me once, it may have happened to you several times already. The problem is that when you have money sitting waiting to be invested, you put money in the first opportunity you find.
There are two problems in this approach.
- Not doing enough research about future growth and market trend.
- Not knowing enough about the possible better alternatives.
In the first, we run into the danger of losing out on investment growth or possibly even, devaluation of asset . On the other hand, the second problem is of missing out on better growth opportunity. So, You should resist your impulses till you have researched sufficiently.
How did I resist my temptation of buying into Facebook?
I went back thinking about fundamental values that I believe in. I like to pick up undervalued stock at discount. Facebook IPO at $38 is not undervalued by any means. It is also against my investment philosophy to buy a stock which may not be in business 10 years from now. All my stocks are bought for 20 -30 years horizon. I can’t be sure that Facebook would still be in business 10 years from now given the dynamic nature of their area of business, social network.
Sure they can start other lines of businesses if they had enough cash flow, the way Google is doing now. I wasn’t sure about their future cash-flow either.
I am not a professional investor who always keeps track of his purchases or study future predictions (charts and trends) regularly. I buy stocks and tend to forget about them for a long time. I am comfortable with stocks that are dividend paying and constantly increasing their dividend over the years, I invest directly in them. Otherwise my ETF’s and MF’s take care of promising start-ups and small cap stocks opportunity.
I came to a conclusion that I would let my fund managers decide if they want to invest in Facebook.
To summarize it all these are the tips that works for me when it comes to resisting stock buying impulses.
Target minimum amount of study before buying – Set a rule not to buy stocks without minimum pre-study. We often get excited reading articles on a particular stock with ‘high potential’. Don’t just jump in to buy it, at least read few other articles on the same company before deciding to buy.
Your broker may extend free/paid analyst research on individual stocks, they are extremely helpful for stock research.
Make a few rules and don’t deviate – The way I had resisted my temptation, you can probably follow that. I made my rule not to invest in a company where sustainability is a big concern. As per my guru, Warren buffet, We shouldn’t invest in businesses which we do not understand.
Not talking about Facebook, we understand how they run. But, there are number of businesses which you may not understand. You have no clue how profit is made and revenue is generated. Develop some solid rules and don’t relax them. For me the biggest rule is whether I can convince myself about long-term sustainability.
Budget for investment and fix quota for various type of investment – if you like, check out “where should I invest my money?“. There are many options to get decent return from your capital. Stock market is not the only one. Diversification minimizes risk of losing money.
Put all eggs in one basket, the basket falls and all your eggs are broken. When you put a fixed quota on stock investment, you automatically safeguarding some part of the money. So, even though you are giving in to impulses, you are reducing the risk.
Remember your past mistakes – I did a blunder in 2008, when WaMu (Washington Mutual bank) was in free fall, I was buying stocks, too big to fail, isn’t it? Well, it failed and so was my hard-earned money. Such was the extent of my loss in WaMu that till last year I claimed stock loss on my tax return, . When you are in middle class, it hurts!
Remember your mistakes, read stories about stock market blunders. Go no further than recent JP Morgan fiasco, with $2B loss, the story should be everywhere. Past mistakes make us prudent in future.
Consult someone who knows it better – We all have some friend, colleague or someone in family who knows stocks better than we do, mostly. Before clicking that ‘buy’ button seek his/her advice.
Even after putting hours researching a stock, you may miss few important points. Second opinion is like a defense. Guard yourself properly before going in for attack.
When you get past all tips above and are still interested, set a limit order – don’t buy at market price. Set a limit at 1-2% lower than the market price.
Readers, as I stated before, I am not a professional investor I may have misstated things here but, hope you have got the idea clearly and loudly.
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I am a bit shocked you were on the verge to of FB. There is nothing tangible about the company.
That’s another way of seeing it. There are many companies which are not tangible and are doing great. Linkedin for example.
I was tempted by the hype of Facebook, until I saw a bit about the company on NBC Nightly News (Brian Williams is my celeb crush… which makes me a little nerdy). Anyway, he said that a survey found something like 53% of Americans thought Facebook was a trend and would eventually die out or be replaced by something else. It gave me pause over the potential for the stock, and I calmly stepped away from my TD Ameritrade account.
I may buy FB eventually, but after much reading and research. Good you watched that NBC news.
I’d add this to your tips: Don’t watch CNBC. 🙂
more specifically don’t listen to Jim Cramer? 🙂
I don’t trade individual stocks any more. I don’t have the time to do the research. The best way to participate in the equity market for most people is through mutual funds or ETFs. You can target sectors or broader indexes and diversify your risk.
Well you buy ETFs on impulses too..It’s less riskier but, still do proper research before choosing a particular ETF.
I definitely agree with your tip regarding rules. Having specific buy and sell rules can remove emotion from the investment process and significantly improve returns.
However, it is also important that the rules generate excess returns over time. Ideally, the rules should be backtested using a research platform (such as AMIBroker).
There are also vendors who provide stock screens that have proven to be successful in the past. AAII’s Stock Investor Pro is relatively inexpensive screening tool with an extensive database. Several of the SI Pro screens have generated 15% – 25% annual returns historically.
While past performance does not guarantee success in the future, I would prefer to use an investment process with a demonstrated historical advantage.
I am not affiliated with AAII or with AMIBroker, but I do use both products.
Brian Johnson
http://www.TraderEdge.Net
Great way to promote your business. Nice job.
Excellent thoughts. I firmly believe that achieving excellent returns in the stock market has very little to do with intelligence and a whole lot to do with emotional self-control and a willingness to have the courage of your convictions (buying when others are selling and vice-versa). It takes a lot of self-confidence to go against the crowd, and a lot of self-control to sit and wait for the right opportunity to come along.
I support this notion fully. Its takes more courage and discipline than talent in stock picking. We all know which stocks are going to go up on long-term. We just lose patience seeing no/negative growth in short-term and trade it sooner.
I can sometimes have trouble with impulse buys with stocks. I only have a problem when I have money in my brokerage account that isn’t currently invested. I consistently buy the first thing that catches my eye instead of sticking to fundamentals.
Thanks for the article!
Man I was in the same boat. I can’t thank my last second decision enough seeing the last two day’s price movement on FB stock.
I like the guide but be careful with consulting those that know better – or rather just be prepared for your audience. With taste and risk aversion floating through spectrums one person’s sure thing might be yours. Just keep that in mind and I think you’ll be all set. Also I trade a bit of Forex and the impulses are even greater for making irrational moves there. It’s all so fast paced it’s easy to get lost in the trades – and eventually lose your principal. I am a huge fan of setting up rules and sticking to them or strategy or a plan. Great post!
Yes, its strange that we don’t know about this impulse purchase. We often talk about impulse shopping. People with investible money indulge as often as others indulge in buying goods. Glad you liked it.
The lessons here can be applied to many other aspects in life as well. Resisting buying things (in addition to stock) is a hard lesson to learn for many people. Weighing the options on a purchase, maybe not even a major one, the cumulation of smaller ones, is often an internal battle where self-control plays a key part. Reading a lot about an investment, whether it be a home, a car, stock or even a potential university for you or your child to attend, knowing your options is obviously the first thing to do. Also, making solid, concrete rules for yourself and your finances is a good idea if you work hard to stick to them. Maybe writing them down and sharing them with others will make sure you stay on track with them. Great (and helpful) post!
Thanks Kelly. I did post about controlling impulse purchases in everyday life. Yes if we ave money we look for ways to spend it for material purpose. This is the way we are born.
Glad you controlled your impulsive desires. I always have to remind myself – there is a different between “investing” and “speculating.”
Thanks for your post, which I think is very good and timely. Something that helped me not letting me participate in Wall Street carried away by impulse, was to build an investment strategy. I have a method that works for me and that I have been refined over the 20 years that I invest in the Stock Market. If you can have an investment strategy and develop the discipline to invest according to your strategy, you’ll see how these impulses gradually disappear. As I use technical tools to select my purchases, Facebook could not be a candidate. It can be a good investment in the future, but when he debuted on Wall Street simply could not be on my list of candidates.
I was tempted by the hype of Facebook, until I saw a bit about the company on NBC Nightly News (Brian Williams is my celeb crush… which makes me a little nerdy). Anyway, he said that a survey found something like 53% of Americans thought Facebook was a trend and would eventually die out or be replaced by something else. It gave me pause over the potential for the stock, and I calmly stepped away from my TD Ameritrade account.