Ever since the influx of retail investors over the past couple years, there are a lot more newbies on these boards and I hear a lot of phrases misused or quoted incorrectly. Here are a handful I've seen that, by debunking/clarifying, hopefully saves people some trouble:
Misconception #1: 'Invest in what you know – Peter Lynch'
This one is wrong out of omission. Peter Lynch never said that it was sufficient criteria for you to invest in a product or company only because you were familiar with. It was merely a starting point. You still need to do research on the fundamentals, like profitability and valuation, before you actually decide to invest in it.
Misconception #2: Time in the market beats timing the market
I hear too many people use this to justify stock picking. This should only be used when talking about buying the market itself, i.e index funds. Just because you hold a stock for 5 years doesn't mean it'll rise in that time, and if you make solid profits or see a good entry point based on valuation, then you should definitely sell or average down respectively. A company's prospects could change on a dime and one should be prepared to act accordingly. What time will allow, however, is median reversion, but that could go in either direction depending on if the stock is trading cheaply or richly.
Misconception #3: The stock went down after I bought it, so I was wrong and/or the stock went up after I bought it, so I was correct.
Investing is at least as much about having a strong stomach is it about being smart/correct. Too many people feel complacent after their stocks or the market does well and feel downtrodden after the market crashes. The price is just what the market is willing to offer you to buy or sell. It is not an indication of the 'correctness' of your decisions. The market price is simply a means of selling things that are trading at a premium to your calculated value, or buying things trading at a discount.
If something you bought 'on sale' becomes even cheaper, and nothing else has worsened about the picture other than market volatility, then one should be inclined to average down. And likewise, if something rises far above what you think a stock's intrinsic value is, selling would be prudent. (unless one is holding for long-term capital gains, but that's another story) If you don't have a price target yourself (not an analyst's), then you should calculate one before you initiate a position.
Misconception #4: The company's doing great, so it must be a great buy!
A great company does not make a great investment. Valuation always matters in the end. If you buy a company performing amazingly like most tech/growth companies in 2021, but buy them at 50x sales, then you're going to have a bad time. Eventually, when valuations matter again, they will crash, as they did this year. There have been far too many story stocks over the past decade, with amazing industry prospects, but basically no fundamentals to speak of.
And even the profitable companies were trading at a sharp premium. Look at Costco, which is still trading for over 30 P/E, despite being a slow-growing company. That's effectively a 3% rate of return in a highly inflationary environment. Even if they grow earnings at 10% a year (which is unlikely), it'll take a long time for your money to double.
Tldr: Fundamentals matter, and if you don't want to do the research, index funds are a great way to get the returns of the market. But if you hold a stock for a long time, you'll get the returns of the business at the valuation you bought in at. Returning to the median works both ways, in that you'll lose money if you bought at a premium, and you'll gain money if you bought at a discount. And none of these principles apply to trading, which is a separate beast altogether. Anyway, happy investing! Hope y'all stay safe and make lots of money in these volatile times!
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