BUY CANDIDATES: DON’T PLAY LIKE AN AMATEUR!
DON’T PLAY LIKE AN AMATEUR: When it comes to investing in the stock market, most under-capitalized amateurs seem to be in a constant search for the ideal stock. Since this is a difficult thing to do with any level of certainty, the amateur will tend to pick only a small sampling of stocks in the most popular sectors of the market.
What often happens to amateur stock players is that they develop a special liking to only one sector of the market – such as technology, gold, or energy. In doing so, these naive investors are not spreading their risk over enough different companies and industries to handle any unforeseen problems that may be unique to that issue or sector of the stock market.
As a novice fresh out of college, I served as the classic example of an amateur investor who was focused on only one industry. Since I had very little stock market experience at that time, I was heavily influenced by whichever analyst or advisor communicated with the highest degree of conviction. For me that person was Joseph E. Granville, a maverick stock market advisor who strongly recommended gambling stocks in the late 1970s. Like most of his followers at that time, my stock portfolio became too heavily weighted in gambling issues. As a result, I got caught in the nasty stock market crash of January 1981 that was triggered by Mr. Granville’s famous “sell everything” announcement.
In retrospect, I see that I made the mistake of thinking that diversification was a sign of not knowing what to buy. I didn’t understand the deeper wisdom behind lowering risk by diversifying assets in a wide variety of areas. As a young man, I was too focused on getting the highest possible returns. At the same time, I was almost completely unaware of the corresponding risks involved with incorporating that kind of investment strategy.
Of course, we all have the natural desire to own the single best stock over the near term so that we can make the most money in the shortest period of time. Yet the indisputable fact remains that no one really knows for sure what that would be. Instead, amateur investors are suckered into following those advisors who cater to our craving for certainty by giving us the most convincing story about their favorite stock or market sector to buy.
In order to succeed at stock market investing over the longer term, an investor must move beyond the unwise idea of owning the stock of just one company in a single industry. The stock market has historically proven to be too uncertain for risking all of your money in just one company. Instead, the proper course of action for investors is to spread their risk over several companies in a wide variety of industries and sectors of the market.