No matter how many other people want to buy a stock, you should buy only if the stock is a cheap way to own a desirable business. - Jason Zweig, The Intelligent Investor
As simple and intuitive as that quote may sound to you, most people, including myself, commit this mistake.
People are not innately mathematical creatures, and we tend to rely on intuition in order to make quick judgements. Unfortunately, there is much more beneath the facade of a stock's price and the promise of getting rich quick that was made to you by your "trusted" friend.
If it were that easy to make money in the stock market, don't you think everyone would be in on it?
A quick tip for those who don't know much about investing:
If you don't consider yourself financially literate, I'd say stay clear of individual stock picking. Although the market (proxied by the SP500) tends to progress upwardly, the probability of you picking any assortment of stocks that will beat the market with certainty is quite low. Fortunately, there is a theory that states that a monkey throwing darts at a stock chart will have an equally likely chance of doing as good, if not better, as professional stock analysts (B. Malkiel). At this point, however, you might as well just buy a lottery ticket.
ETF's to the Rescue!
Instead, simply buy into ETF's that track the markets. For example; had you bought into the SPY ETF, which tracks the SP500 index, you would have had an astoundingly high performance with next to no risk (in the sense that the probability of the SP500's value ever dissipating is next to none).
You'll have all the time in the world to focus on other things, while you sleep well knowing that the market is chugging along year after year (after taking into account the cyclicality of an economy) yielding you healthy, inflation-beating, returns.
Cheers, Gio
Links:
What does a true stock analysis entail?
Liked this post? Consider buying me a coffee :)