Haven't contributed to the STT forums in a while so thought I would share an article I wrote recently on my site. As HC doesn't allow links to external sites I've pasted the info here:
Which stock should I buy?
This is by far the most common question people ask me on social media. It’s also, by far, the dumbest question anyone can ask when it comes to investing.Don’t get me wrong though social media provides tremendous opportunities for investors. The sharing of ideas, education and stock analysis cannot be ignored as speculative investors have access to more information than ever before. The amount of highly experienced and successful speculative investors who willingly share their expertise to total strangers online has opened up the door to one of the greatest opportunities available to new speculative investors in the history of financial markets. No longer do you need to sit alone in your room marking up a charting book or learn the basics of fundamental analysis. You can now talk directly to the author themselves as well as the thousands of people who have read through the same content you have.
Beware of the pitfalls though before you trust everything you read. Even though everything you’ve read in this article so far all sounds great and exciting however there is one major thing missing. That is the willingness of speculative investors actually wanting to learn. Like in many other aspects of life, people would much rather go for the easy road and search for tips online rather than spend the time mastering their skills. Case in point “which stock should I buy” removes the need for the investment of time to actually build up the necessary skills and experience required to find winning stocks.
Which Stock should I buy? Two outcomesThere is no shortage of people online who target and prey on new investors by making outrageous calls. By asking “which stock should I buy” will only result in people giving you their number one stock they want to run so they can sell. I will admit that in my early years I was a speculative investor that went in looking for tips that were going to make me rich.
I will share two examples with you just to show you the two extreme sides of the coin. Names and stock codes will be withheld as it doesn’t add any value to the discussion. I assure you though that these two events really happened to me.
Let’s start with a positive example. A number of years ago a broker released a research report for a stock which was trading at $0.008 and gave it a target of $0.05. By the time I saw this research report the share price had already moved to $0.022 and I immediately jumped straight in. I had no idea really what this company did but I saw the target and the big run that had started so I blindly jumped in.Within a week the stock had hit $0.07 and a new price target of $0.10 came out so I wasn’t going anywhere. It wasn’t until the share price was at $0.04 that I realised that it was all a scam. The broker who released the report was also a major shareholder of the company so I don’t need to explain why he created so much hype. Either way, I was happy with nearly a bag locked in and thought I was a genius.
The next example did not go down so well. I was actually with a friend who got a call from someone saying that this stock was going to go crazy with some upcoming news not being far away. This information was based on some social media posts circulating at the time. I remember this day so vividly and it’s what made me take a step back and review what I was really doing in the markets. While he was still on the phone I pulled out my phone and bought $10k worth of stock at $0.40c.I had never heard of the stock, didn’t know what industry they were in and really had absolutely no idea what or why I was buying. That same night the company went into a trading halt which subsequently ended up being negative news which sent the stock into a spiral. My $10k just started washing away and I ended up selling only a couple days later for a massive loss. $10k for any new investor is a huge deal so safe to say this one really hurt.
The reason I give these two examples is to show you that getting it right by chance is probably one of the worst things that can happen to you. You start to build an ego and actually think you know what you are doing and so you continue with this strategy until you lose most of your money.
Practical Takeaway
Every speculative investment that you ever consider buying must be analysed against your Investment Strategy. Instead of asking “which stock should I buy”, you should be creating an investment strategy that includes a number of factors that must be met in order for the stock to be worthy of purchasing. For example a few factors that I look at in every speculative investment is the Market Capitalisation, Enterprise Value and who is in the Top 20. If the Enterprise value is over $10m for example then I will not buy the stock. Impulse buying can immediately be eliminated if you have a trading plan that you religiously adhere to.
