Confessions of a Stockaholic

Posted by dfederman on Jun 17, 2011 in Investor Education | Comments Off

Yesterday I ran into a neighbor who stopped me and said, “What is the deal with the stock market? It’s IMPOSSIBLE to make money in stocks.” He went on to tell me how he read William O’Neil’s book, “How to Make Money in Stocks,” and he’s been implementing the trading rules recommended in Investor’s Business Daily (O’Neil’s publication), such as “sell when your losses reach 7 to 8% below your purchase price.”  He explained that he was more aggressive and used a 10% stop/loss price.  In the two instances he used this discipline, his stocks were sold (for a 10% loss), then subsequently jumped more than 30% in the following weeks!  He then pulled out an annual report for an oil service company who does business in the Gulf of Mexico. He frustratingly asked me, “how can this stock NOT be doing well? Look at their financials! They’re making tons of money.”

I am SURE this is a common experience of many individual investors (or stock traders who think they are investors). This guy is trying his best to following a well-documented trading/investing discipline, yet his personal experience is that it is much more difficult than it appears. Meanwhile, he has a 15 month old son who has 16.5 years left until he reaches college age. I suggested thinking in terms of financial goals (such as college savings) rather than trying to make quick gains in the stock market.

I told him people who are socking away money into their 401k’s are making money in stocks. He said, “yeah, but it’s only their contributions that are adding up.” It’s all a matter of perspective of when you take the snapshot of account values. The point I am really making is that consistent contributions to investment accounts are critical to reaching investment and financial goals. Also, the longer the time horizon, the more likely someone will earn positive returns on stocks. My neighbor’s problem is that he’s desperately trying to earn 20 to 30% returns in very short time horizons. Without trying to sound too preachy, I opined that stock trading is an addictive behavior, and it will likely prevent him from achieving long-term financial success.

Dan Federman, CFP(r)

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