SOMEONE once said, “Common sense is so rare, it should be considered a superpower.” This is particularly applicable to investing in the stock market.
“Common sense” may be defined as what a reasonable person would do in a particular situation, rather than what would be the “common” or most expected behavior of a majority of people. In other words, what most people would do is not always the most sensible.
Stock-market investors are often like a tribe in a deep jungle that has been cut off from civilization (and the advances it made) for the last 1,000 years. If, 10 generations ago, my great-great grandfather’s great-great grandfather thought that solar eclipses occur because a monster was eating the sun, then that is good enough for me.
While the origin has been lost in the dustbin of history, there is a firmly believed stock-broker concept that there are only three choices for stock-market investors: “buy”, “sell” or “hold”.
Actually, there are only two.
The way I understand it, a “buy” stock will see its price go higher; a “sell” stock will see its price go lower; and a “hold” stock is one where the analyst does not have any idea which way its price will go, or otherwise, it would be a buy or sell.
So if an investor owns a “hold” stock, he or she might as well flip a coin to determine what to do with it, since even the expert does not have a clue on what the best strategy for it should be.
Maybe this will help: In almost all of life, we are only confronted with “buy” or “sell” decisions; we are rarely confronted with “hold”, if ever.
While you may not think about it, you unconsciously deliberate every morning on whether you want to continue to work in the job that you have. If you decide to sell, your workplace performance during the day will reflect your decision. There is no such thing as hold. You are either 100-percent committed to the job or not. Anything less is really a sell. If you don’t believe that, just ask your boss one morning if it is OK to choose to only put in a 50-percent effort for today. Common sense says that if you are not fully committed to your current job, you have, for all intents and purposes, quit it.
Every stock-market trading day, ask yourself this: If I did not already own shares of XYZ Corp., would I buy it today, based on the current trend, price and situation?
If the answer is yes, then you hold, and pretend that you just bought it. If the answer is no, then you sell. You never buy a stock hoping that it will go up. You buy because you are absolutely sure and know it will increase in price and your potential profit will offset the risk. Otherwise, why would you put your hard-earned money into that investment? Holding a position that you already own that you would not buy today is hoping. Common sense says that, if you would not buy the stock today, why do you still own it?
If everyone is buying, then sell, and if everyone is selling, buy. That worked very well when investors read stock prices literally off a ticket-tape machine, not on a globally connected computer that moves information at the speed of light.
When a stock price goes down because the majority of investors are selling, the price is going to continue to go lower, and that is what a reasonable person would expect to happen. If you own a clothing store for ladies, and women refuse to buy anything green and want blue clothes this year, would you stock on only green dresses? No, common sense says that you would stock on blue dresses.
Too many investors use a thought process and display behavior in the stock market that would get them run over by a jeepney in real life. Looking both ways before crossing the street is common sense in the stock market, too.
E-mail me at mangun@gmail.com. Visit my website at www.mangunonmarkets.com. Follow me on Twitter at @mangunonmarkets. PSE stock-market information and technical analysis tools provided by the COL Financial Group Inc.