6.6: Famous Myths and Stupid Sayings

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Let’s now turn our attention to common advice that is best to be avoided with our Famous Myth and Stupid Sayings. Most of these are paraphrased from One Up On Wall Street by Mr. Peter Lynch. “It can’t go any lower.” Oh, yes, it can! Until the stock price hits zero, it can and usually does go lower. Once the stock price hits zero, then it can’t go any lower. “It can’t go any higher.” Oh, yes, it can! There is no limit to how high a stock price can go. If the earnings are growing, if the story has not changed, if the business prospects look bright, the stock price can continue to rise. “It’s only $2 per share. What can I lose?” Everything! The stock price can go to zero and you will have lost your entire investment. In these three sayings, the person giving the advice has focused on the price. The price is irrelevant. What is the value?

“It has to come back.” Oh, no, it doesn’t! Companies can and do go bankrupt and become part of history. Have you ever heard of Penn Central, the nation’s largest railroad company that had been in business for over 100 years when it became the country’s largest bankruptcy up to that date? How about Trans World Airlines or Kodak? “It’s always darkest before the dawn.” Oh, yeah? Sometimes it’s always darkest before it’s pitch black.

“When it rebounds to $10, I will sell.” This is an example of the loss aversion tendency that we humans exhibit. The stock has no idea you bought it at $10. If you would not buy it now at this price, accept that you made a mistake, sell it now, and take the loss. Remember, you will quickly forget about this unpleasant experience. If you hold onto the stock, every time you review your portfolio, you will be reminded of your blunder. Another example of loss aversion is the adage, “If it goes down 10%, sell.” Yes, the advice is trying to help you avoid large losses. However, the problem is that stock prices fluctuate greatly, even blue chips. If you sold each stock that lost 10%, you would almost always sell your winners along with your losers. Research and investigation are the keys to determine when to sell, not volatility.

“It is taking too long.” Patience is the prudent, long-term investor’s most important trait. Besides, it gives you a chance to buy more! Remember that investing is a marathon, not a sprint.

“Look at all the money I’ve lost! I didn’t buy it!” You did not lose a cent by not buying a stock that did well. Do not fret over it. Do your research and investigation and determine if it is still a good value now for the long term. “I missed that one, I will catch the next one.” The problem with this strategy is that “next one” rarely makes it. An exception to this rule happened in the big box do-it-yourself sector where Lowe’s was able to carve out a substantial niche for themselves after Home Depot had pioneered the business strategy.

“The stock has gone up, I must be a genius.” There is an old saying in the investment community: “Never mistake a bull market for brains.” If you talk to seasoned investment professionals, they will tell you that the time they started their career affected their career greatly. The folks who started just before a major bull run will tell you that it was actually a curse, not a blessing. They began to feel invincible … until the next bear market. The individuals who started in a difficult market quickly learned humility and will tell you that it was a blessing for them.

“The stock has gone down, I must be an idiot.” This is the previous saying in reverse. You are no more an idiot than the individual whose stock has gone up is a genius. You are going to make some mistakes. Redouble your research efforts and if you would not buy this stock at this price now, sell the loser.

“It’s different this time.” As discussed above, this saying and the next two are three of the most dangerous phrases you will ever hear as investors. Yes, technically, it is different every time. But that does not mean you should pay an astronomical price for a company that probably will never make a dollar of profit such as the Internet stocks of the late 1990’s and the marijuana stocks or cryptocurrencies of today. “It’s a new era. The old ways of valuing stocks are gone.” Ditto. When you hear this, it is time to sell. “It’s a permanent trend.” What? There ain’t no such thing! “Permanent trend” is an example of an oxymoron, heavy on the moron.

And finally, you will hear friends and family members and colleagues say, “Stocks are too risky.” It is perfectly normal for individuals to fear stocks and stock investing. Here is where you come into the picture, Dear Investment Gurus. You will speak with authority and confidence. You will assure them that even with all the shenanigans, silliness, and stupidity, investments in businesses through stocks or stock mutual funds are still the best financial alternatives for patient, prudent long-term oriented investors. Of course, pointing them to BUS-123, Introduction to Investments, is yet another way to help them learn the good news. Thank you for your referrals. They are greatly appreciated!