Ten myths of stock market investing – Part 4
We come now to the last part of this series. In part 3 of the Ten myths of stock market investing, I discussed myths no. 7 and no. 8 and those are that investing in the stock market is risky and that investing in the stock market is best left to the professionals. Let us conclude with the last 2 myths.
9.) You should only engage in stock market investing when the overall economic and business climate is good
The most basic and ideal rule of the thumb in investing in the stock market is to “buy low and sell high.” Ironically what most stock market players try to do is to “buy high and sell higher.” Unfortunately they end up “Buying high and selling low.”
It comes as no surprise that this happens to most stock market players because they succumb to “market” sentiment. Their buying decision is dictated by fear and greed. When the overall market sentiment is fearful then most market players stay out of the market. This usually happens when times are tough or when the economy is in bad shape. However when the overall economic and business climate is good, most market players jump into the stock market.
I remember sometime in early 2008 when the world economy seems really going to hell. I was telling a friend to open an online stock market trading account. She told me that when she went to the bank to open her account, a bank employee asked her why she wanted to get into the stock market when the world economy is such in a bad shape. This is the typical response of the “misinformed.” This is what I call as seeing the glass being half empty. I told her, this is precisely the perfect time that you should get into the stock market ! This is the time to see that the glass is “half full.” Value investors dream of times when the economy is doing so badly that the stock market is giving stocks away. I just couldn’t believe the bargains that were available during that time. Stocks of blue chip corporations are even sold way below book value! I grabbed the opportunity and loaded my portfolio with such stocks. Almost a year later, the price almost doubled in value and I ended pocketing a near 80 % return on certain stocks.
Lecturing to a group of students at Colombia University, Warren Buffett who was then 21 years old said “I will tell you how to become rich. Close the doors. Be fearful when others are greedy.
Warren Buffett is notoriously famous for selling out certain positions when the economy seems very rosy, the overall market sentiment is that of greed and that the market is at its all time high. He does exactly the opposite when the general sentiment is that of gloom and doom. It is during these times that he acts greedily and snaps great companies when the stock market is giving stuff away.
At the bottom of the bear market in October 1974 a Forbes article featured an interview with Warren Buffett. He was asked how he feels about the bearish market. Buffett wisely replied “Like an oversexed guy in a whorehouse. Now is the time to invest and get rich.”
Warren Buffett’s greatest buys were not done in times when the overall economic and business climate is good. They were executed when the overall economic and business climate are in their worst.
10.) Investing in Real estate or other vehicles of investment is more profitable than stock market investing.
When prompted to invest in real estate by a friend Warren Buffett is said to have replied “Why should I buy real estate when the stock market is so easy?”
In the post entitled “Investment vehicles that yields 15 % return,” I have extensively discussed and pointed out that investing in a business is much more advantageous and profitable than investing in Real estate or any other vehicle of investment.
Investing in the stock market is investing in businesses. As a value investor and as a follower of Warren Buffett’s methods, I subscribe to the mindset that when you buy a stock you are buying a business. Without a doubt, investing in businesses is more profitable than investing in real estate or any other vehicles of investment, hence the belief that Investing in Real estate or other vehicles of investment is more profitable than stock market investing is purely a myth.
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