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.