My friend told me about a stock that he said was going to go up big. I bought the stock, it went up by $5 per share, but then dropped quickly below what I paid for it. I was worried about losing more money and sold at a loss. How do I know when the right time is to sell so I don’t make that mistake again? – Anthony V. ’22, mathematics major.
Erkis: Anthony, thank you for the question. I too have situations where I wished I would have sold earlier before a stock price fell. The straightforward answer to your question is that it is virtually impossible to regularly sell at the right time. This is because the market moves very quickly and you are up against investment professionals who spend more time than any individual investor can on the stock market.
I try to only purchase investments that I understand. Investing means purchasing the stock of a quality company that you expect to do well over the long run. Looking for a quick profit is speculation. Trying to time the market by buying before the stock price increases too much and selling before it drops may work out from time-to-time, but it will not work out on a consistent basis.
There is an old saying about investing in stocks: “Fear and greed move the market.” I try to keep this in mind when I am investing. The goal is to buy low and sell high to make a profit. But many of us do exactly the opposite! We buy high and sell low because of fear and greed. It is terrifying to watch a stock you own lose 30% or more of its value. Most people will want to sell immediately to save whatever is left. But if the company is a good company, it is often best to just hold on. Greed leads to buying the stock of a company you don’t know anything about hoping for a quick profit.
Lubomirski: I don’t own any stocks yet, but it’s always a great time to learn about them! When Professor Erkis talks about fear and greed, I understand how easy it could be to let emotions drive investing decisions. I too would be encouraged by gains and hit hard by losses. When I start investing for the first time, my mindset will be to invest a small amount and expect some losses. Then I won’t be disappointed if the price goes down.
This discussion shows that when making investments a person should try to keep emotion out of it. When I have money to invest, I am going to do my best to just let the investments sit over the long run and try not to check on how they are doing every day. Contrary to what would likely be my initial instincts, calming down and stepping back is the best way to not make the common mistakes Professor Erkis talks about when investing over the long term.
Nothing stated in this column should be considered investment advice or an offering of securities. Stock investing has risk and you should do your own research before investing. If you have a question that you would like answered, please send them to [email protected]
