7 Biggest Mistakes Investors Make
Because guess what? Another guy will be on in five minutes, telling you
about his idea for the best trade, and it’ll be something altogether different!
Can they both be right? And either way, how is the strategy of a
professional money manager – with hundreds of millions to invest, and a
full-time research staff at his disposal – right for you? It can’t be. He’s
operating in a different universe from yours. Ever notice how many of the
fund managers on TV are touting the big-name, big-cap, widely traded
stocks? That’s because with tens of millions or hundreds of millions under
management, they can’t be jumping in and out of illiquid small caps –
exactly the kind of stocks you’re nimble enough to enter and exit quickly.
Fund managers strive to outperform the major indexes.
That makes it too risky to hold large positions in too
many thinly traded small caps. Why is that? Because
smaller stocks are often more volatile than bigger, more
established companies. Say Fund Manager Joe Schmoe
decides to start making some purchases in Acme
Widgets, which trades 300,000 shares a day. Because so
few shares are available, it’s probably going to be hard
for Joe to get the shares he wants. His buying pushes the
stock’s price higher.
But the next day, Fund Manager Jane Schmane realizes that her investment
in Acme has netted her a paper profit, and she has some reasons to
reallocate cash. So Jane begins unloading shares – which sends the price
lower as quickly as Joe sent it higher.
That’s grossly oversimplified, of course, but you get the idea. That’s a big
piece of the reason why these guys on TV will keep telling you why Wal-
Mart (which trades about 17 million shares a day) or Microsoft (which
trades about 58 million shares a day) is or is not a good idea today. They
won’t be talking about a little-known tech stock that is showing fantastic
gains, and has excellent earnings – but only moves 300,000 shares per day.
Seven Biggest Mistakes Investors Make