I find it amazing, that it takes a while, before a lesson, given a long time ago, sinks in. I have had too many of those. I am just thankful that I eventually catch on. (At least to some of them.) This one involves researching individual stocks.
About 35 years ago I was in sales, and a then emerging company was my corporate account. I was involved with the selection of the types of automation equipment that were used in their new plants. At the time, we were working on 3 new plants. I was on my way to a meeting, when I heard a report on the radio, that the stock price for this company had fallen 22% over the last few days, because they might be in financial difficulty. I was very concerned, as this was my largest customer, and accounted for a good portion of my pay cheque.
After our meeting, I asked one of the senior managers about the news report. Was it true? He said that as far as he knew, there was no basis for the report. He went on to say that he was actually buying as much additional stock as he could afford because of the drop in price. He also suggested that I do the same. The thought of investing money in a stock that was going down must have shown on my face. What a weird idea. Common sense says you should only buy stocks that are going up.
He laughed at me. “Eric” he said “You know how to make money on the market. Buy low, sell high. I know the growth projections and financial situation of the company. This is a very short term fall in the stock price. I am sure that in the weeks ahead, it will rebound to even higher levels. Buy some stock.”
It turned out to be one of the biggest missed opportunities of my life. We had just sold our house and were sitting on the proceeds for next 10 weeks, till the deal on the marina closed. I had a large chunk of money sitting in a Savings account doing nothing. Should I take the advice and buy the stock??? The manager had never steered me wrong in the past.
I discussed the idea with my wife. Should we, or shouldn’t we?? We of course, did not do it. We had no experience with the stock market, and “WHAT IF WE LOST IT!!”
Long story short, if we had of bought the stock, and sold it 8 weeks later, we could have bought the marina for cash, with some money left over. We would potentially have been set for life. It is a good story. I should have understood the lessons much sooner than I did. There were two major lessons to be learned.
Lesson 1. Figure out how to invest in stocks, so that you could take advantage of a similar situation next time.
Lesson 2. Insiders know more about the company, than any analysis. Follow what the insiders are doing.
Fast forward 20 years. I was between jobs, and figured I better put the time to good use. Maybe I should start learning about the stock market and stock investing. So, I started reading, attending seminars, and setting up an online trading account. I was finally learning lesson 1. I did take my own advice, and did not make a real trade for the first 6 months. I really suggest you practice for a YEAR, but I am impatient. I took the time to learn about the research tools on the trading platform, and how to do the entries for buying and selling stocks. Took several years to learn how to do that effectively. There are more options than just “Buy” and “Sell”.
I admit, I was darn lucky when I started, and made some lucky decisions. Then one day I was researching a potential stock when I scrolled down further on the website and I noticed an “Insiders” report. The Lesson 2 light started to flash. Wow! Here was a way to see what the insiders are doing. This became, and still is, one of my most important research tools. If the stock price is down, and the insiders are buying, there is a very good (not guaranteed) chance that the overall market might be missing something. Vice versa, if the stock is rising, and the insiders are selling, does that mean they know this price is higher than justified, so they are taking profits??
They say you only have to be right on the market for 60% of the time to make money. After tracking insider action for over 15 years (every trading day), insiders are way more accurate than 60%. But not necessarily over a 3 to 6 week period. They may buy 12 months before the stock goes up. They may also sell sooner than the market realizes that the price should go down.
Tracking the insiders will not tell you when the stock is highest or lowest. If you are trying to do that, I feel sorry for you. It is a fools’ game. Remember, the trick is to buy low, (not lowest) and sell high. (not Highest.) There is a quote from Warren Buffet that goes “I have made most of my money from selling too soon.” Learn from that one. It is 100% accurate. Just because it goes up for 5 days does not mean it will continue, or not drop lower that it started in 1 day.
A lot of the common knowledge we hear is B.S. Stock investing success depends on research, patience, setting buy and sell limits, reading charts, reading financial reports, and guts. The TSX dropped over 600 points in the last 4 days. But several of my stocks have also gone up, and hit the sell level for a profit. Some have hit the sell level to limit the losses. I have bought extra stock of some of my good companies, so that I can dollar cost average down.
For every stock you buy, you need to set limits!! A limit, that if it falls below, you sell no matter what. You don’t need a special app, just use the right kind of sell order. You also need to set a limit at which you will sell, no matter what. Both of these can be frustrating. Stock prices move up and down every few seconds. But limiting losses, and taking a profit before it disappears, is how to make money. Losing everything in the market is easily avoided.
Are there lessons you were taught years ago, that you haven’t learned yet??