Cardinal Mistake of the Stock Market: Speculation

There’s a lot of hype involved in the stock market. It’s an exciting avenue filled with twists and turns. But true intelligent investors know how to avoid the high risk game. True investors can separate good companies from bad and low prices from high. Admittdely, it’s very easy to get caught in the game. You hear about a great stock pick, you do 12 minutes of “research” on Yahoo Finance, you have a gut instinct that this stock is “the one”, next thing you know you’re buying it. A purely speculative purchase. Sure you might strike the nail on the head a few times, but you also are enabling potential huge losses. Plus you lose a lot of sleep every night wondering if you missed your chance to sell. Sounds a lot like a night at the casinos, doesn’t it?

I don’t like to gamble. I think it’s a nasty habit that has an unusually addicting sensation – together making a dangerous combo. And speculating as to what stocks can go higher based on the market hype is just that – a gamble. The cardinal mistake that you can make while chasing positive ROI is following the hype and throwing your savings into a roulette table. A true investor has to have the courage and discipline to do thorough research and not follow the hype. When you hear of a hot sector or a hot stock – don’t get caught up in the hype and “follow the crowd”. Warren Buffet calls these people “lemmings”. Lemmings usually follow the crowd even when they jump off a cliff (I’ll write a quick post on that later).

Bottom line – and I’ve said it plenty of times – find good companies with good management which are selling at good prices. Be patient and discipline, and only then you’ll be a true investor.