Do you find yourself always searching Bloomberg or BNN or other finance related websites and channels to see what the hottest stocks are? What are the so called experts predicting and recommending for stock A and B? Which stocks are just soaring so much that makes you want to get into them right away? Which stock are analysts rating a buy the most often?
Many people get sucked into the hype of new and exciting stocks that everyone is talking about. Experts, analysts, and even your friends are telling you to buy it. There are many stocks out there that are new and exciting and are always being advertised, so people want to get in to these thinking they will see gargantuan returns. The reality is that most of these exciting stocks are simply priced around speculation and frenzy, completely ignoring the fundamentals of the company itself that are used to value a stock in the first place. Stock price movement is driven by buying and selling volume, so when there is a buyer frenzy, the stock price will go up. The problem is when you want to get in on the action and you end up buying at a high, then all of a sudden the stock starts to fall because everyone wants to lock in profits. You see your investment tanking, so you panic and sell. By the time you sell, the stock has already reached a bottom and starts trending upward.
This is known as the "Buy High - Sell Low" phenomenon and is the number one mistake that all beginner stock traders and investors do. Why? It's because human nature forces us to use emotion in our decision making. It takes years of training to take emotion out of investing decisions, and this is the key difference between an experienced investor and a beginner stock trader.
But why did you start buying this exciting new soaring stock in the first place? Most likely, you heard about it from a friend or saw it being featured on a news broadcast or website. Again, "recommendations" like this are all based around a speculative emotion of excitement that a stock "is going to triple in 1 year!" or "this is the new future!". Really... and how does the "expert" know that? Reality is, they don't. No one has a crystal ball, and no one knows or can predict what the stock market or any individual stock will do in the future. One can use the current and projected fundamentals of a company, past performance, and technical charting to weigh the probabilities of the direction in which a stock will move, but no one will ever be able to tell you with full 100% certainty what the market or any stock will do. No one knows. Simple as that.
Analyst ratings are another great source of nothing. Stocks that are part of investment portfolios within financial institutions will have ratings given to them by the analysts that cover those stock holdings. Stocks will either have a "Buy", "Hold", or "Sell" recommendation. Let me ask you something... when was the last time you noticed a stock with the majority of analysts recommending a "Sell"? The answer is almost never. Most analysts get paid to make "Buy" recommendations by the investment bankers that work with the company to issue stock or corporate bonds. They're best interests are in the company they work for, so why would analysts recommend a "Sell" of one of their stock holdings?
The next time you are doing some research to choose your next investment, it would be wise to take "expert opinion" and "expert advice" that you saw on TV or heard from a friend with a grain of salt. If you are managing your own portfolio, do your own research and come to your own conclusions before making an investing decision. There's nothing wrong with being open to opinions and discussions around a particular investment, but make sure you are buying it for reasons that you have defined, not someone elses. For the less experienced or beginner investors, don't hesitate to talk to a qualified financial advisor before making any investment decisions.
Experts are always wrong, but a true expert or experienced investor will be right more than they are wrong, and that is the real challenge!