8 easy ways to lose your shirt in stocks
1. Buy a stock just because it's 50% off its high. This makes sense at
first glance. A company like Boston Chicken, one that you know because
it has an outlet around the corner, issues a warning that earnings will be
lower than expected, and the stock plunges. That's an obvious opportunity
to pick up a bargain, so you buy.
But then comes a second wave of bad news, and a third, and suddenly a
stock that was at $41 1/2 is stuck at $1 9/16.
"People make an investment in what they think is a turnaround and never
ask themselves why they are buying it," says money manager Frank
Cappiello at McCullough Andrews Cappiello. "Never buy anything that's
cheap just because it's cheap. That low P-E (price-earnings ratio, stock
price divided by the most recent 12-month earnings) may be telling you
something."
Cappiello's advice: Don't buy a restructuring company unless revenue is
improving, and set a limit for how much money you are willing to lose.
Most pros bail out after a 15% to 20% loss. And if you're going to play
this game, stick to big-name restructurings.
In 1991, the stock of Citicorp, the biggest bank in the country, sank to a
10-year low of $8 1/2. The bank looked to be on the verge of collapse.
But there was little chance of it going under, because federal regulators
couldn't risk the impact on the U.S. banking system. Now Citicorp stock
is selling for around $155 a share.
2. If a stock is down, buy more. You've bought a stock you like, and it
suddenly tanks. Why not buy more? After all, if it was a good buy at $30
a share, isn't it a better buy at $24?
This can make sense. If the company reported a one-time drop in
earnings, or if there was a drop in the overall stock market, it can be a
buying opportunity and a chance to lower your average price per share.
Some stocks, such as CompUSA or Intel, are highly cyclical, going down,
then back up, all the time.
But what's more likely is that the stock is out of favor with Wall Street's
big institutional investors. To protect yourself, avoid buying more stock in
a company that has reported multiple earnings disappointments.
Cockroaches don't live alone.
3. Take all the free advice you can get. Everyone these days has a hot
stock tip, or some kind of investment advice. But no one really has all the
answers. Wall Street analysts, whose job it is to study companies, rarely
get a jump or a hot tip. So why should you believe a taxi driver?
Remember, "If you hear a hot tip at the country club, it's old news to the
markets," says Kathy Stepp, financial planner in Overland Park, Kan.
If you're thinking of acting on that kind of advice, at least take the time to
check it out thoroughly, says Karen Spero, a financial adviser in
Cleveland.
"Don't be casual about your investments. Think about how long it took you
to make that money," she says.
4. Bet the house. "I'm seeing brokers advise clients to take out a
home-equity loan and buy stocks," says David Root Jr., an investment
adviser in Pittsburgh. Root sees this is as the ultimate in speculation - the
opposite of the most basic investing rule, that you shouldn't risk money you
can't afford to lose.
No potential return is worth putting yourself out on the street. It's a great
way to get poor quick. The problem, Root says, is that "investing is really
a game of fear and greed. Investors usually get caught up in one of the
two." Don't be greedy.
5. Plan? What plan? Mark Bass, a financial planner in Lubbock, Texas,
says he's seen people jump from oil and real estate in the 1980s to raising
ostriches in the 1990s. The results for most investors have been more
dismal than delightful. Yet people keep on diving into the latest fad.
Now, he says, it's a rush to load up on Internet and other technology
stocks. He sees this as a can't-lose mentality that comes from having no
long-term game plan.
Don't try to rationalize stupidity. Anything can make sense if you try hard
enough. The question is, does your investment strategy fit with your real
needs and tolerances.
"I can find a strategy out there for the sun to rise in the West, but it would
require a whole lot of tequila and sleeping in the wrong direction," Bass
says.
6. Trade often. Americans are trigger happy. Researchers at the
University of California at Davis recently completed a study of investment
activity by 60,000 households from 1991 through 1996. The average
household replaced 80% of its common stock portfolio each year. So
much for buy and hold.
Even more startling, the most active traders averaged a 10% yearly return
compared with 17.7% for those who bought something and held on.
Professors Brad Barber and Terrance Odean conclude: "Trading (active
buying and selling) is hazardous to your wealth."
7. Panic. Or buy high, sell low. "I reacted to a momentary movement in
the market," confesses James Keithly, an environmental consultant in
Seattle. Last November, in the aftermath of the first wave of the Asian
financial crisis, Keithly jumped in and bought shares of Dell Computer - a
company that has made millionaires of some individual investors - at
$84.90 a share. Two weeks later, the shares were down sharply, and
Keithly ran for the exit, selling his stake for $71.60 a share. Where is Dell
now? Around $94 a share.
Keithly, who reports a string of recent good decisions, says he now
spends more time studying company financials and avoids getting sucked
in by momentum. He believes the best tactic when market sentiment dips is
to zig when everyone else zags.
8. And if you don't like stocks, buy Beanie Babies. You've seen the
mobs. Beanie Babies are hot property. Major League Baseball teams at
the bottom of their divisions promote "Beanie Baby Day" and pack the
stands. Parents fight for the last stuffed animal. Some collectors will pay
almost any price.
So why not buy Beanie Babies, or any other hot toy, as an investment?
Planner Kathy Stepp actually has had prospective clients try to stake their
future on the latest fad.
"There are people I've run across who invest in these kind of fads and
think they'll be able to make enough money some day to send their kids to
college, " she says.
"It's fine to collect Beanie Babies or Cabbage Patch Dolls, but to collect
them to make money is nuts."
Almost as nuts as some of these other sure-lose strategies.
By David Rynecki, USA TODAY |
