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Pitfalls of Illogical Investing: Buying Based on “Buzz”

After years of observing investor behavior, I find that many people do not make money in the stock market when trying to invest on their own. What are they missing? Often, a plan and the discipline that is necessary to be successful in choosing, buying and selling investments.

When I would ask about the basis for buying a particular stock, some of the answers I heard were completely irrelevant, such as, “I heard someone talking about the company at the barber shop.”

Let’s say that stock goes up because a lot of people are talking about the company; in other words, because there is “buzz” about it. Then it starts to fall because there are really no solid fundamentals that will help the business sustain long-term profitability. The novice investor wants to hold the stock, hoping to get back to its former high. Seldom is that achieved, and soon the investor may face a substantial loss.

A good plan would probably not have allowed you to buy the stock and if you did, you would likely not stay in and ride it down to a loss.

Another issue is one of timing. People tend to be out of the market when they should be in. Often they have been scared out by a major decline in equity values and they just can’t take it any more. Then they will come back in the market when there is a considerable rise and they think they have missed the boat. Often they will invest in the hot part of the market that is likely already overpriced – and headed for a crash. Then they repeat the whole cycle over again, losing money on every round trip.

Decisions that are made emotionally often lead to failure in the world of investing. The alternative is to be sure your investing decisions are based on solid facts rather than fleeting “buzz.” If you don’t have the time or expertise to do your own research, it’s often best to turn to a professional who can work with you on a plan and help you execute it with the necessary discipline.

What’s the most outlandish “reason” you’ve ever heard for buying a stock?

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Posted in Financial Education, Reaching Retirement.

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