1. Investing in Stocks Is Just Like Gambling.
This reasoning causes many people to shy away from the stock market. To
understand why investing in stocks is inherently different from
gambling, we need to review what it means to buy stocks. A share of
common stock is ownership in a company. It entitles the holder to a
claim on assets as well as a fraction of the profits that the company
generates. Too often, investors think of shares as simply a trading
vehicle, and they forget that stock represents the ownership of a
company.
In the stock market, investors are constantly trying
to assess the profit that will be left over for shareholders. This is
why stock prices fluctuate. The outlook for business conditions is
always changing, and so are the future earnings of a company.
2. The Stock Market Is an Exclusive Club For Brokers and Rich People.
Many market advisors claim to be able to call the markets' every turn.
The fact is that almost every study done on this topic has proven that
these claims are false. Most market prognosticators are notoriously
inaccurate; furthermore, the advent of the internet has made the market
much more open to the public than ever before. All the data and research
tools previously available only to brokerages are now there for
individuals to use.
Actually, individuals have an advantage
over institutional investors because individuals can afford to be
long-term oriented. The big money managers are under extreme pressure to
get high returns every quarter. Their performance is often so
scrutinized that they can't invest in opportunities that take some time
to develop. Individuals have the ability to look beyond temporary
downturns in favor
3. Fallen Angels Will Go Back up, Eventually.
Whatever the reason for this myth's appeal, nothing is more destructive
to amateur investors than thinking that a stock trading near a 52-week
low is a good buy. Think of this in terms of the old Wall Street adage,
"Those who try to catch a falling knife only get hurt."
4. Stocks That Go up Must Come Down.
The laws of physics do not apply in the stock market. There's no
gravitational force to pull stocks back to even. Over 10 years ago,
Berkshire Hathaway's stock price went from $6,000 to $10,000 per share
in a little more than a year. Had you thought that this stock was going
to return to its lower initial position, you would have missed out on
the subsequent rise to $70,000 per share over the following six years.
5. A Little Knowledge Is Better Than None
Knowing something is generally better than nothing, but it is crucial
in the stock market that individual investors have a clear understanding
of what they are doing with their money. Investors who really do their
homework are the ones that succeed.
Don't fret, if you don't
have the time to fully understand what to do with your money, then
having an advisor is not a bad thing. The cost of investing in something
that you do not fully understand far outweighs the cost of using an
investment advisor.
The Bottom Line
Forgive us for ending
with more investing clichés, but there's another old adage worth
repeating: "What's obvious is obviously wrong." This means that knowing a
little bit will only have you following the crowd like a lemming. Like
anything worth anything, successful investing takes hard work and
effort. Think of a partially informed investor as a partially informed
surgeon; the mistakes could be severely injurious to your financial
health.
