5 Investing Statements That Make You Sound Stupid
The White House last weekend renewed threats to raise tariffs on Chinese goods, sending shivers through Wall Street.
As the trade war heats up this week and weighs on stocks, many protectionists who support trade barriers are crowing about how new U.S. tariffs paid by China are filling the coffers of the U.S. Treasury.
This assertion is just plain wrong. Common misconceptions about tariffs are bringing to my mind other ways that investors can make themselves sound, well, stupid. First, a word about tariffs.
The U.S. Customs and Border Protection (CBP) agency typically requires importers to pay tariffs within 10 days of their shipments clearing customs. These tariffs are paid to the U.S. government by importing companies that act as middlemen between suppliers and corporate end users. Most importers of Chinese-made goods are U.S. companies.
A company that contracts with an importer usually sees the costs of that contract rise after a tariff has been imposed on goods it imports. The importer’s client often makes up for the added cost by passing it along to customers in the form of higher retail prices.
That’s the simplified version of how a tariff works. But the upshot remains the same: a tariff is a form of taxation on consumers. China has responded with retaliatory tariffs on U.S. goods, hitting American farmers especially hard.
It’s not just about trade. During my many years as a financial analyst, I’ve encountered a lot of foolish investment assertions.
Albert Einstein said: “Only two things are infinite, the universe and human stupidity, and I’m not sure about the former.”
It’s my civic duty to make you a better investor. Here are five of the dumbest investing statements I’ve ever heard. Each is followed by a remedial lesson. These phrases are common but deadly for your portfolio.
See if you can read my list, without wincing.
1) “I wouldn’t buy stocks right now because the market is performing badly.”
Don’t watch market fluctuations too closely. If you put your money into inherently strong companies, they’ll be fine 10, 20 or 30 years from now. Bull and bear markets come and go. Equities as a whole rise over the long haul.
2) “I bought a mutual fund that tracks a broad market index. That’s all the diversification I need.”
Diversification is important. Investing in a mutual fund pegged to, say, the S&P 500 is a good start. But it’s not enough. You should also diversify among categories of stocks, bonds, interest-earning investments, real estate, international equities, etc.
3) “I just bought a stock and it’s tanking. I’m gonna cut my losses and dump it.”
Checking the performance of your portfolio or a single stock on a frequent basis is a recipe for losing money. Keep sight of your strategic investment goals.
Once you’ve bought a stock with solid fundamentals, remain patient. Don’t get rattled by temporary setbacks and the inevitable ups and downs. Own companies with strong fundamentals and undervalued share prices.
4) “My broker is a genius. He’ll make me a fortune.”
If there’s any recurring theme in this newsletter, it’s the need for you to think for yourself. Many brokers are reputable, honest and hardworking. But not everything a broker does is to your benefit. There can be some self-interest built into a broker’s advice.
Falling for bad advice can wreck your returns. You must arm yourself with information that’s objective and based on the facts, not advice from someone who makes a living from commissions. Do your own homework.
5) “The investing rules are different this time around.”
Oh boy. Number five is particularly harmful. Certain immutable laws govern the economy and financial markets. They don’t change over time. It’s like saying “gravity doesn’t always apply” and jumping off a roof.
Pick a fairly valued company that you understand. Make sure it’s selling products and services that people need. Insist on a solid balance sheet. Keep an eye on economic cycles. Beware of excessive valuations. An investor who says time-tested rules no longer matter is a sheep about to get fleeced.
Have you overheard (or in a weak moment uttered) a really dumb remark about investing that you’d like to share? Drop me a line at: firstname.lastname@example.org
The next Apple…
The fast-moving technology sector seems to attract the smartest…and the dumbest…money. I’m reminded of this staggeringly obtuse statement, uttered by someone who should have known better:
“There is no reason anyone would want a computer in their home.”
As Homer Simpson would say: D’oh! Those words were spoken in 1977 by Ken Olson, the founder of Digital Equipment Corp. (DEC), about the burgeoning personal computer industry and its stocks.
As upstarts such as Apple (NSDQ: AAPL) soared, revolutionized society, and made billions of dollars, Olson never was able to re-position his once-mighty company, which made “minicomputers” for businesses.
Over the years the floundering company’s assets were sold to various other companies, such as Compaq. DEC merged in 2002 with Hewlett Packard (NYSE: HPE), which ceased to use the DEC name and later encountered its own woes.
Are you looking for the next Apple? Our investment team continually looks for companies in the vanguard of breakthrough technologies. You can stay on top of the latest opportunities by following our chief investment strategists.
John Persinos is managing editor of Investing Daily.