INDIVIDUAL STOCKS STRUGGLE DURING A CORRECTION
While this may be common knowledge to most, I just want to bring this to everybody’s attention. An overwhelming majority of individual stocks are not going to advance when the major indexes are correcting (moving sideways or down). So why take a chance? Remember, you’re an investor not a gambler against all odds.
Discipline is perhaps one of the most important virtues for a successful investor. There are simply not a lot of good times to make a purchase. That goes for stocks, land, gold, oil, etc. Remember, the key is to buy low and sell high.
BEWARE OF STOCK RECOMMENDATIONS!
When I first started following the stock market, I thought the best way to get involved was to have a group or individual who had a previously successful investment record invest money on my behalf and that is precisely what I did.
I found a mutual fund that had a very successful five year tenure and invested my money with them until I felt comfortable making my own individual stock decisions.
Naturally, I was quite eager to get some investment insight when the money manager for this mutual fund was being interviewed. I suppose it would be a cardinal sin for a reporter not to ask a successful money manager what stock(s) he (or she) recommended and this particular interview did not disappoint.
When the money manager was asked what stock he would recommend without hesitation he went on to not only name a stock but to speak quite well of the company.
Knowing the success of the mutual fund he ran, I immediately started checking out the company but there was an obvious red flag that came to my attention.
When studying this particular company’s stock chart, it seemed that while there was a significant amount of low volume buying in the stock, (probably due to a large contingent of small investors who were also familiar with the interview) the big money trades, were to the downside. Because of this, I never did purchase the stock.
A few months later I followed up on the stock to see how it did from the time of the recommendation. I saw the stock was trading near it’s peak when the mutual fund manager recommended it however the stock since then had moved quite a bit lower.
Furthermore, I was able to review records of what this particular fund actually bought and sold during this time and was substantiated when seeing this mutual fund was actively selling this stock while speaking highly of it.
You see, when managing a fund, it is much more difficult moving money around than if you are an individual investor. Successful funds can have millions, (or billions) of dollars invested in a company that can be a significant percentage of the outstanding stock. In some cases, if the fund were to sell off too much of their position, it could send the stock into a significant and steep sell off. Because of this, funds will usually, gradually add too or sell off their positions.
The lesson to be learned is an obvious one. Do your due diligence and buyer beware!
