Stock lesson II

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Follow the crowd; follow the stock picker or gurus such as Jim Crammer without doing own research; follow the friends.

Following the crowd is dangerous because statistically majority of small investors lose money in the stock market (I know I am since got into market in late 2003). I think one reason for doing this is the “herd” mentality – most of us have it. We feel safe to buy the stocks when the market is up; vice versa. But as the famous investor Warren Buffett says “buy when people are scared; sell when people are greedy”. 1999-2000 dot com is a perfect example, many people made money on the paper but they did not get out, while some others (who did not follow crowd) did make real money.

So “follow the crowd” is out, how about follow Warren Buffett? It’s a good idea and it’s usually safe approach (because Warren makes safe bets these days, and sometimes he just sits on the cash). But remember Warren’s investment objective is not same as yours: he may expect a 10% return because he got 40 billion already. Another thing is we don’t know when he will sell. This applies to Jim Crammer’s mad money also well.

Follow the friends: I did this when I first started. I bought a stock called “LookSmart” after he bought (and I paid a higher price); I sold after he sold (and I sold for a lower price). Looking back, I think I was pretty stupid (not smart). It’s not that my friend’s pick is bad, the timing is an issue (because the friend can not be available 24×7). Also tangling the stock (money) with friendship is not a good pratice. We can talk about stocks, but do our own research and make own decisions. 

The bottom line: only you know your own objective. Doing the stock research not only helps making wiser decisions; it could also be fun. Don’t blame the friends for our own mistakes.      

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