Investing Tip:

Investment Fallacies

There are a number of 'old sayings' on Wall Street about how to invest. Unfortunately many of them are pretty bad advice. Here are a few of them.

"Cut your losses and let your profits run" Wouldn't that be great if we could do that? Unfortunately, if a stock goes down 10% how do you know if it's going to go down another 10%, or whether the stock is now going to triple? You don't. Following this advice will get you to move in and out of stocks more frequently, generating more commissions for the stock broker.

"Don't fight the tape". Meaning if the market is going up, follow along, if it's going down, do the same. This is a little like saying "What goes up, keeps going up" and "What goes down, keeps going down". But there is little evidence that this true. The markets have a nasty habit of turning on a dime and leaving you in the dust.

"Bulls make money, bears make money, but pigs never make money" The idea is that if you get piggish (i.e. overly greedy) you'll get burned. The intent of this saying is to get you to sell stocks you have a profit in. It generates more nice commissions for your stock broker.

If these old sayings don't work, why do they persist on Wall Street? For two reasons. One is the idea that the markets move in predictable patterns is a comforting one, though history shows just the opposite is true. The second is that stock brokers make more money when you trade more frequently. These sage sounding pearls are to help convince you to do just that.

But there is another saying on Wall Street that really tells you the truth about how to handle you investments. "It's a market of stocks, not a stock market". It's not important what the 'market' is doing. What's important is what your stocks are doing. Choose good companies, buy them cheap and stick with them until they are no longer bargains. That's the key to investing success in the long run, not old sayings.

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Donald Steinmann and Advanced Financial Management assume no responsibility for any actions taken due to comments made in The Investment Tip of The Week.