Love is blind is an adage often used for someone who is in love but cannot see any faults in the other person. It can also apply to investments. Keeping emotions out of your investment decisions is easier said than done.
Falling in love with certain stocks or sectors is a common mistake made by the average investor. Being overly optimistic or hoping that a losing position will regain its original purchase value can damage your investment returns.
Negative Thinking Can help you Avoid:
Investing in stocks that are cheap because of a problem with the company or the economy. A bottom-fishing investor speculates that the stock’s depressed price is temporary, will recover and make for a profitable investment. Bottom fishing is a risky strategy because the company’s stock price is depressed for a reason and may not bounce back.
A stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Stock traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves.
The technique of buying a fixed dollar amount of a particular investment on a regular schedule, regardless of the share price. More shares are purchased when prices are low, and fewer shares are bought when prices are high. I found averaging down on a losing position will result in losing even more money. (Averaging up on a winning position is a much better strategy)
Don’t Catch a Falling Knife
Most people just can’t resist a good bargain. But the stock market works in a different way. Stocks that seem high in price tend to go even higher. Stocks that fall usually go lower. Buying a falling stock can have the same effect as trying to catch a falling knife: You’ll get hurt, almost every time!
Dead Cat Bounce
A dead cat bounce is a price pattern used by technical analysts. It is considered a continuation pattern, where at first the bounce may appear to be a reversal of the prevailing trend, but is quickly followed by a continuation of the downward price move.
Pigs get Fat, Hogs get Slaughtered
The market can punish greed through unreasonable expectations. An investor who is doing well might expect to do even better in the future ignoring reversion to the mean. This may cause the investor to hold onto stocks past the optimal time to sell them or overpay for new holdings. This mistake commonly occurs in market bubbles.
A market theory that suggests that when a company reveals bad news to the public, there may be many more related negative news that have yet to be revealed. The term comes from the common belief that seeing one cockroach is usually evidence that are many more that remain hidden.
A Rising Tide Lifts all Boats or Even Turkeys Fly in a Strong Wind
Two old stock market clichés that says, all stocks tend to go up when the market has a large powerful upward move. Although there is an element of truth in this, many stocks were left behind in the second quarter of 2009.
Buy on Rumour, Sell on News
You often see stocks rise in the lead-up to earnings announcement, only to fall immediately after the good news has been revealed. This is because savvy investors will buy stocks on the first sniff of good news and then take profits once the news has been released. (I believe that information is often leaked to the business media ahead of time)
Ever wonder why advice from parents or grandparents tends to lean more on pointing out the negative side of things?Does wisdom come from age or do past experiences with making bad decisions make older people more cautious?
The real power of negative thinking is being objective and putting equal weight to the pros & cons to your decision-making process. It shouldn’t stop you from taking risks but it should prepare you for things that could go wrong. For example: I started my own business knowing that 80% of Canadian small businesses fail within the first 5 years. I put money aside to cover six months of living expenses and updated my resume just in case.