Colminey

Get email notifications on new posts:

Don’t Pick Your Own Stocks
24/01/2019
Don’t Pick Your Own Stocks
That's how I got into investing, but it's also the reason I'm not yet financially independent.

Young Investor

I was lucky to have to financially-responsible parents who opened savings plans for my sister and me when we were little. These plans ended when I became an adult, so I had money to invest at a very early age.

What I didn’t have was someone to educate me on investments. Neither of my parents had any entrepreneurial spirit or inclination towards financial independence. They let their bank sort their savings into low-risk channels.

I, on the other hand, was never swayed by authoritative figures. I checked the returns of my old savings plans, and decided I could do better. While browsing my bank’s website, the thing that caught my eye was the stock market.

Drawn to Simplicity

There were government bonds, corporate bonds, options, trust funds, other funds… I didn’t understand most of those products. To be honest, I still don’t fully understand.

Stocks, on the other hand, seemed simple. Buy shares of a company when their price is low, sell when it’s high. Unknowingly following the old advice to only invest in things you understand, I began trading in stocks.

The obvious question was how to pick them. While not particularly lazy, I never had much patience for boring tasks. Researching each company and analysing its financial reports hadn’t even crossed my mind, not to mention analysing whole market trends.

Technical Analysis

I was a lot more interested in stock charts. As a logical thinker with good spatial intelligence, I immediately began looking for patterns. This is called “technical analysis” – using patterns and “signs” to decide when is the best time to buy and sell a stock

This practice is not as controversial as you might thing. Everyone agrees that stock prices are strongly influenced by investor psychology. So even if you don’t believe in technical analysis, the fact that other investors look at the stock chart and make decisions based on it – makes technical analysis real.

Technical analysers have complex theories about a wide variety of minute patterns. I never got this deep, but rather tuned my radar for the most obvious of situations. When a well-performing stock dropped by a few percent, I would buy it, and sell it a few days or weeks later for a small profit, when the drop “corrected”.

Catching a Falling Knife

That’s the name for my trading strategy, and you can imagine why.
Most people reading this right now are thinking: “So you’re telling us not to pick stocks because you acted like a young fool and lost money on bad bets?”

Well, yes, but its a bit more complex than that. I made some pretty good “bets” for a while, until the 2008 crisis came and drove everyone to losses, except the ones patient enough to wait several years for the market to recover. I wasn’t patient, but I did sell at an early stage, before the losses were huge.

I kept out of stocks for a few years. When I came back, my basic tactic didn’t change, but I was a bit more sober, timing my investments more carefully. For example, I bought Volkswagen stocks at the peak of their emission scandal, when I was convinced the stock would bounce back. It did, and I made a nice profit.

I also took advice from a friend who had more patience for reading financial reports, and who was better acquainted with certain markets. Thanks to him, some of my new investments were actually well-informed, and everything went according to plan.

And then it didn’t.

I don’t believe in destiny or karma, but there are times when my luck is so unbelievably shitty that it seems to defy any logical explanation.

This time there was no market crisis, just internal turmoil inside each company. Terrible quarterly reports. A scandal involving one of the CEOs. An employee strike. A police investigation involving one of the companies – and Israel’s prime minister, no less!

One after the other, my stocks crashed, some of them dropping 15% each days. I sold one at around € 8k loss, and have been waiting for the others to recover… for about 2 years now. After the recent market crash, my current non-actualised losses are around € 60k. If I had that money invested in loans, I would be well into my early retirement by now.

Picking Stocks

Needless to say, I’m not the only person to have been burned by stupidly picking stocks. I believe that if you do it long enough, no matter which strategy you use – you are very likely to end up in loss.

Does that mean that investing in the stock market is inherently bad? No. Buying any kind of fund, rather than specific company stocks, significantly increases your diversification, preventing a few bad apples from spoiling your entire portfolio. Diversifying across several funds is even better. If you know enough to pick those funds yourself – go for it.

Otherwise, do yourself a favour and let your bank or investment firm manage this part of your portfolio. Not only do they have more knowledge, they also get paid to sit around researching this shit all day long. If you’re like me, you do not want to spend your time like that.

Sadly, experts are not immune to mistakes – far from it. Whenever I look at my parents’ bank-managed portfolios, I see that many of their assets are at a small loss. But thanks to very wide diversification, the portfolios themselves are usually at a profit.

Then, of course, there are other investment channels – real estate, or loans, which are my new personal favourite.

Legal notice: This post is not meant as investment counselling! I’m just a fellow investor sharing his personal experience and thoughts.

Facebook Comments:

Leave a Reply

Your email address will not be published.